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