Thursday, October 18, 2018

Why China Can't Compromise on a Trade Deal

Debt is money spent in the present 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) versus Chinese debt (red line) and GDP (black line).  The 0 to 24 year old Chinese population swelled by over 300 million from 1950 to it's 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.  Contrast that with the quantity of debt being forcibly injected into a nation that faces a massive imminent population decline.

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).
Massive overcapacity (thanks to over a decade of government mandated mal-investment) versus a 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) follows the working age population growth (blue line, below) and only through massive debt has China been able to maintain inorganically high growth rates.
But the population that does all the work and most of the consuming is in secular decline versus a ramping population of elderly.  Chart below shows working age population (green line) peaked in 2011 will be falling for decades versus 60+ year old Chinese population (mandatory retirement in China is 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.


  1. Chris: Your economic essays are the clearest explanation of why there is the use of QE, tariffs, and a trade war. When the economic pie is no longer growing these weapons are used to attempt to deal with this reality. How does one survive given where the world is presently and where it is going over the next few decades?

    1. @ Jack - What to do in the face of a global paradigm shift is a question each of us has to answer. Clearly, the central banks don't know and are just make it up as they go. If I had a good answer how to navigate this, I'd share it...but truth is there are way too many variables, legacy issues, geo-politics, etc. for me to solve this equation.

      I just try to follow some basic, simple rules and hope for the best but plan for the worst. Glad to hear your thoughts...


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