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Monday, May 2, 2016

Myth of China As Exporter Turned Domestic Consumer

If a business could foresee that it would have a declining consumer base (declining number of total potential customers), that would likely be a pretty good reason for serious concern and significantly lower growth expectations.  However, when it comes to China, the shrinkage of it's under 65yr/old population and particularly the 20-59yr/old adult population declines is somehow coinciding with the story of China transitioning from an export to a domestic consumption based economy?!?  To wit, with a declining population of 0-64yr/olds and likewise 20-59yr/old adults, China will transition from exporter to consumer (while all those grown "one child" policy adults support their 65+yr/old parents) and still grow 6%-7% annually?  Inquiring minds wonder how it's possible a declining base of consumers would consume more???  And in a word...CREDIT!!!  And, the growth of credit in China has simply gone, to use the technical term, "apeshit" or parabolic or feel free to substitute any of the terms meant to indicate highly unsustainable and likely ruinous.

This really isn't a difficult story to understand although many go to great lengths specifically not to understand it...something to do with what Upton Sinclair said.  “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

The Details:

Each bar in the chart below represents annual growth or decline of the Chinese adult population and the blue line is a 4 period moving average of the population change.  From 1973 through 2008, an additional 12.5 million Chinese adults entered the Chinese economy every year.  That meant 12.5 million more consumers, home buyers, car buyers, potential job seekers, etc. etc.  But since 2008, annual population growth has decelerated by 95% and by 2017 or 2018 begins a long decline.  Every year from 2018, the adult 20-59yr/old population of China will decline by millions for at least 2 decades and likely far longer.  This is no forecast or "gloom n doom" fantasy, simply counting the # of people born and tracking them through the population (plus, China has net emigration).  All this means the charts below likely show a best case scenario although the population data could be lower if greater emigration occurs or a higher mortality rate ensues due to illness, environmental, or global disturbances (aka, war).
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China's central bank, the PBoC, has been pushing rates down since the Chinese population growth peaked and began decelerating (just like the majority of the developed nations central banks).  In China, the adult consumer population growth peaked in 1989 and rates peaked in the early '90's and have been declining since (chart below) to incent a slowing rate of population growth to consume more (above the level wages and savings could support).
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And the impact of the lower interest rates above combined with China's capability to push loans out has had an amazing impact on credit creation (below)!  The hockey stick chart of total Chinese credit creation is a monument to the mantra, "build it and they will come".  The only problem is the Chinese have used the lower rates and massive credit bubble (aka, debt) to build out infrastructure, apartments, factories, shopping malls, etc. etc. for a population base that is never coming!?!  Credit has been used to build millions of generally unaffordable apartments for a middle class and overall population that has already peaked and is fast receding.  Building out somewhere from 50 to 100 million excess apartments and likely trillions of excess retail square footage for a population under 65yrs/old in fast decline is the insanity only award winning PhD economists could applaud.
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The chart below puts all the pieces together so the inter-relationship can be clearly understood.  Population growth slows and credit is made cheaper to incent a level of growth via debt beyond the populations general capability.  As the population growth slows more dramatically, rates must be lowered in kind and debt ramped up to maintain "growth".  Of course, what happens next as the adult consumer depopulation begins (simple fact...not forecast) should be obvious...NIRP, QE, and all the kings horses and all the kings men will try to put Humpty Dumpty back together. 
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Beginning in 2018 and accelerating thereafter, there will be millions fewer adult consumers in China every year (indefinitely).  On the flip side, the needy 65+yr/old population will swell until China's total population peaks around 2030 and begins its Japanese style long term depopulation.  All this while interest rate policy plus debt creation are both already effectively exhausted.  There simply is nothing more to build when there is already such overcapacity and non-performing loan growth.  The Chinese determination to add new credit fuel in excess of $1 T in the 1st qtr alone of 2016 is the stuff of hyper-monetization (money fleeing China and creating bubbles the world over) and potential hyperinflation.  Sometimes reality bites...but pretending all is well is simply no longer a viable option.


Extra Credit:
Real World Implications of China's hard landing using oil as a proxy.  The first chart below shows the change in global oil consumption (by period) since 1980.

Next, the sources of the growth in oil consumption split between the wealthy OECD, non OECD (minus China), and China.  Since '07, China is responsible for 75% (net) growth in global oil consumption.  How they did it, via quintupling their total debt from $7 T to $35 T, shouts this is unsustainable.
Lastly, the annual change in Chinese oil consumption, growth in debt, and change in 15-64yr/old population (below).  And now the demographic decline really kicks in.  The myth of China's transition to domestic consumption is in big trouble...and the myth of Chinese growth (period) in global consumption is likewise busted.
Those curious what all this means for the wage growth in China, the global economy, commodity consumption, treasury purchases, etc....Here



***All data via OECD.stat and St. Louis FRED.

2 comments:

  1. Thank you for your excellent analysis.

    A lot of people are saying India is the next China. Maybe you could write a post on that?

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  2. Yes This article really sums it up. It has to make you wonder though: what the hell is going on? It isn't like they don't know this. It Vancouver (and other cities) real estate markets being hyper inflated due to the expatriating of capital. It is as if the Chinese know the fiat currency isn't worth anything and are willing to buy ant tangible asset, and especially out of the communist government's reach. What if this is the spark that ignites the break of faith in fiat currencies world wide. Hyper inflation will ensue with more and more asset classes being going from inflated to hyper inflated.

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