Thursday, October 18, 2018

Why China Can't Compromise on a Trade Deal

Debt is money spent in the present, a rent to be paid as long as the debt remains, and an obligation to be repaid in the future.  Given this, I thought I'd contrast China's population of young versus their obligation to be repaid in the future.  The chart below shows the 0 to 24 year old Chinese population (green line, population data via UN) versus Chinese total debt (red line) and GDP (black line).

The 0 to 24 year old Chinese population swelled by over 300 million from 1950 to its ultimate peak in 1991.  Since that peak, the total population of young in China has fallen by 176 million, or a 30% decline in the number of children across China.  Moving forward, the UN medium estimate hopes the formal elimination of the one child policy will simply slow the rate of decline in the population...but by no means will China's fast declining childbearing population (those aged 15-44) nor disproportionately young male population potentially be offset by a slightly less negative birth rate.  The population will continue collapsing, it's just a question of how fast!  Contrast that with the quantity of debt being forcibly injected into a nation, a nation that faces a massive imminent population decline, to achieve pre-determined GDP growth targets.

To put that debt into perspective, the chart below shows that total debt and annual GDP each divided by the 0 to 24 year old Chinese population.  As of 2018, every child and young adult in China under the age of 25 is presently responsible for over $100 thousand dollars in debt while the annual economic activity (GDP) created by all this debt continues to lag ever faster.  And the coming decade only worsens as the young population continues its unabated fall and debt creation (absent concomitant economic growth) continues soaring...building more capacity all for a population that is set to collapse?!?
China's predicament and reaction to it are not particularly unique...but given China's size, the ultimate global impact of China's slow motion train wreck will be unprecedented (particularly as their 15 to 64 year old population is now in indefinite decline).  Chart below shows annual change in Chinese 15 to 64 year old population, in both millions (green columns) and percentage (blue line).  Peak annual 15 to 64yr/old population growth took place in 1985, adding nearly 19 million to China's core population in that year alone.  Compare that to the decline of 3 million in 2018 and the accelerating declines, in excess of -10 million annually by 2034.
Massive overcapacity (thanks to over a decade of government mandated mal-investment) versus an ever swifter declining base of consumption does not add up to a burgeoning middle class or a happy ending.  Simply put, GDP growth (black columns, below) generally follows the working age population growth (blue line, below) and only through running a large trade surplus coupled with massive domestic debt has China been able to maintain inorganically high GDP growth rates.
But the population that does all the work and most of the consuming in China is in secular decline versus a ramping population of elderly.  Chart below shows working age population (green line) peaked in 2011 and will be falling for decades versus a near doubling of the 60+ year old Chinese population by 2050 (BTW - mandatory retirement in China is currently set at 55 for women and 60 years old for men).
Of course, this same situation was seen in Japan and Germany well before it presented itself in China, but the global import market was still growing fast enough to support Japanese and German domestic depopulation through higher exports.  Unfortunately for China (and India and most other nations hoping to export their way to prosperity), that option has now expired as the chart below details the same dynamic of declining working age populations and surging elderly among the major importers of the world (as I have previously detailed for the US and the broader global consumer population, HERE.).

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