Thursday, December 21, 2017

China Raging Against Dying of the Light...Or Why Peak Employment in China is Imminent

China's working age population is clearly defined as those aged 16 to 50 years old for females (55 for "white collar" females) and 16 to 60 years old for males.  China mandates retirement at these outer age limits.  Perhaps of some interest should be that this working age population peaked in 2011 and has been declining since.  This decline will continue indefinitely as China has a collapsing childbearing population (detailed HERE), net emigration (outflow), and a still decidedly negative birthrate.

There is no evidence to believe the working age declines will abate any decade soon.  As the chart below shows, China's potential workforce will be shrinking indefinitely...and by 2030 China's potential workforce will be over 100 million fewer than the 2011 peak (an 11% decline)...and only further down from there.
China has one of the youngest average retirement ages in the developed world.  On average, according to a recent study (HERE), Chinese leave the work force by age 55 compared to age 63 in the US (Norway has the latest average departure at age 67).  So, perhaps China will be raising the retirement age to curb the ballooning 60+yr/old population entering retirement (chart below...chart shows retirement population, 55+ females and 60+ males)?  More on that later.
Comparing the working age population versus the 60+yr/old population (chart below...again, showing the 55+ females, 60+ males).  A shrinking potential workforce since peaking in 2011 and a rapidly growing elderly population.
Below, that elderly growth versus the working age depopulation as a % of all adults (chart below)...think hockey stick.  After nearly six decades of maintaining a consistent 60+yr/old % of the adult population...the elderly explosion is just beginning.
If we take the now declining total potential working age population vs. China's still rising total number of employed individuals (according to Statista)...the chart below shows that if China adds just a mere million employees a year (about a third of the annual average employment growth seen from '06 through '16)...that by 2030 China's employment will exceed 100% of the potential workforce.  Wait...what?!?  Or perhaps working from the premise that people who don't exist can't be's time to start considering China's employed population is set to begin falling.

This idea that there are "millions upon millions of Chinese just waiting to be incorporated into the workforce"...not so much.  While a continuing shift from rural to urban is likely, China has already or will soon experience peak employment. Simply put, there will be fewer consumers of everything (homes, cars, appliances, etc.) every year than the year before.  Whatever overcapacity exists now will be joined by massive increases in excess housing, excess production, excess shopping malls as this depopulation plays out over the coming years and decades.

Five big points here:

1) China ends one child policy, with little to no impact...
  • Although China implemented its one child policy in 1979 and officially phased it out in 2015, China's birthrate was actually consistently higher than most of the other major economies in East Asia (Japan, S. Korea, Taiwan, Singapore...chart below) and only N. Korea's fertility rate is currently higher.

  • None of these other East Asia nations ever implemented birth restrictions.  Instead, their populaces chose not to replace themselves responding to the availability of birth control, surging costs of child rearing, and inclusion of females into the workforce, etc.  Simply put, the one child policy was inevitable and has now organically gone global.  The phase out of this policy will have little to no impact of China's fertility rates.
2) China to raise retirement age, but no time soon...
  • In early 2015, China suggested it would detail in 2017 (which I still have not seen) a gradual, multiyear process to raise the retirement age (China's version of political suicide).  Suggestions focused on slowly, incrementally, raising female retirement ages to match males and likewise, pushing retirements out by a month or two per year.  However, none of this was even suggested to start within the next five years and like most things, almost surely be back-end loaded so any real impacts are overstated.  Regardless Communist or "Capitalist" politicians, the game is the same.  A little "razzle-dazzle" that ensures any negative policy impacts never occurs on your watch.
3) China to institute Universal Pension Plan...
  • In late 2015, China said "We will achieve a basic pension for all employees nationally".  Currently, about 800 million of China's 1.3 billion are eligible for state pensions.  According to Sinosphere, pensions for non-state employees vary widely, as high as 3000 RMB ($480) month in Beijing to as little as 80 RMB for rural farmers.  Civil Servants pensions are generally higher than those of non-state employees.  The party statement said, China would be;
    • “Building a fairer and more sustainable social welfare system.
      Implementing plans for every person to take part in social insurance.
      Diverting capital from state-owned enterprises to social security funds.
      Offering all urban and rural residents insurance for serious illness.”

4) Chinese wages & average per capita disposable income rising but gains are hugely variable...

  • While Chinese factory wages in tier 1 urban areas are now inline with Portugal or S. Africa, this terrific rise has created it's own problems.  The rise in wages has been met with inflationary spikes in rents, fuel, food, etc. etc.  Average disposable income has risen in the urban areas but flat at best across rural China.  However, the response of employers to the spectacular rising wages has been automation, a shift away from labor intensive production, and outsourcing to lower cost countries.  This is at odds with the generally low skill/low education rural population looking for opportunity in the urban areas.  The breadth and size of further gains in disposable income is likely to be limited.  Economically, a declining total number of workers making marginally more money will not provide the desired growth.

5) China cannot export its way out of this...
  • The annual change to the 0-64yr/old combined populations of the 35 OECD nations (US, Canada, Europe, Japan, S. Korea, Australia/NZ) plus China, Brazil, and Russia begin declining in 2018 (chart below).  The core populations of the nations responsible for consuming 80%+ of all Chinese exports have peaked and begin shrinking.  Fewer consumers every year than the year before, indefinitely.  As for the nations that are doing all the growing, India and Africa, they consume about 4% of all Chinese exports.  BTW, the chart below shows when each nation/region 0-64yr/old population began declining.

Simply put, China is offering to increase and broaden it's pension system to a ballooning population of elderly but will have a decreasing potential number of employees from which to pay for that increase?!?  How will China achieve this?  Well, as the chart below shows, as Chinese core population growth has been decelerating, Chinese debt growth has been accelerating.  While China's GDP and energy consumption have led the world, they have not responded in kind to China's debt explosion and exponentially more will be necessary to continue to show "growth".  Over a third and perhaps half of all the debt has been mal-invested in a housing bubble for a population that is never coming.  What comes next isn't going to be good for China nor the rest of the world as China looks to flood a depopulating nation with new debt only creating more housing overcapacity...China will look to beat the Japanese at the debt game.

For instance, the Chinese public-pension system as of 2014, took in 2.33 trillion yuan in revenue and paid out almost 2 trillion...with 3 trillion in net funds.  The net outflows and drawdown of those net funds is imminent.

But not to worry, the Communist Party explained that..."We will look at some opportunities with higher yields but will contain risk".  Again, no details were offered.  However, one asset it is clear the Chinese will not be buying...US Treasury's (chart below, showing the net purchases since the debt ceiling debate of July 2011 according to TIC).  Since that date, China has been a net seller of US Treasury debt despite running record US dollar surplus' (BLICS = Belgium, Luxembourg, Ireland, Cayman Island, Switzerland).
From 2000 'til July 2011, China recycled 50% of its dollar trade surplus into US Treasury debt accumulating over $1.3 trillion.  Since July 2011, China has net sold over $100 billion and as of October, held about $1.2 trillion (chart below).
But I'm pretty sure those dollars aren't sitting fallow and are finding their way into some asset, probably one in particular that is selling on the cheap about right now.