China - Demographics and Economy



 

China’s Demographics and Economy

 

Overview


Overriding any economic discussion is that China is a totalitarian state and its political elite will not tolerate any independent source of power or wealth - sees them as a threat. All individuals are monitored and rated; a low score can have consequences. A member of Communist Party is planted in every large corporation, and probably most small corporations, to watch owners and managers. As a result, many entrepreneurs are scared to make decisions. Many wealthy people want to leave China. A huge amount of wealth is being smuggled out of China. Sales of many foreign firms are falling. American car companies in China are losing money. Net Foreign Direct Investment (FDI) is negative - foreign firms are taking more money out of China than new investment going into China. 


A large part of foreign investment was Southeast Asians speculating in housing. There were always a lot of empty apartments held for price appreciation. Many Chinese families own two or more units as a form of savings; China has a small social safety net, especially for retired citizens. 

Domestic and international investors in empty apartments are now losing money as apartment prices fall. Maybe a total of 40-50 million apartments are vacant; some estimates are higher.

At least 10-20 million families put down payments of 50% on housing that has not been build or is unfinished. Some of these units may never be built. And yes, it was a Ponzi scheme. The Chinese government has some small programs in place to limit the damage, worried that the anger may be directed towards the government.


Demographics

 

China's population is slowly falling; the yearly reduction will accelerate in the near future. It is also rapidly aging because of below replacement birth rates since the 1980s. Birth rates were below replacement (an average of 2.1 children per woman) during "one child" period of 1980 to 2015. They are even lower now, about 1.1 children per woman. This is one of the lowest birth rates in the world.


China currently has had a relatively young average-age population but the average age is rising very rapidly because of the very low long-term birth rates. This year China’s median age (half above, half below) will pass that of the United States. 


Although China’s total population is failing slowly, the age distribution is changing faster. The number of children is going down. China’s working-age population is already shrinking.  By around 2050, the decrease since 2012 will be about the size of the current U.S. total labor force (170 million).  Or about 25% fewer workers.


The number of Chinese over the age of 60 has been increasing rapidly. China’s over-60 population of over 300 million is already close to the total population of the United States. By around 2050, the over-60 population is projected to be around 500 million, over 35% of China’s total population.

China has a special problem that could affect future demographics. Chinese youth, ages 19-24, have a very high unemployment rate, probably over 20% and possibly much higher. The government stopped publishing statistics and then came out with a new series with a lower unemployment rate. Colleges graduates in particular are finding it hard to get a decent position; many are unemployed, accepting menial jobs just to earn small amounts of income, or moving in with relatives. The government's policy is to tell the unemployed youth to "eat bitterness." 


At a minimum, this will probably affect future demographics and economic growth – lower income, later marriages, fewer children. This is in addition of a dearth of females because of the past “one child” policy that led to tens of millions of abortions of female embryos and female infanticide.

The latest long-run population projections indicate that China’s current population of 1.4 billion people has peaked and will fall to about 750 million in 2100! China will account for most of the global decline in population for the rest of the century. 

As in the United States, a stagnant or declining population is not spread evenly across the country. Government policies to help rural and inland areas do not seem to be working. Between 2010 and 2020, 1,240 counties and county-cities out of 1,866 saw their populations shrink, maybe by up to 35%, as birth rates fell to record lows in many rural regions and people continued to go to cities in search of work.


The Economist, “China’s last boomtowns show rapid growth is still possible,” July 30, 2024.


This will increase the problems associated with urbanization. China is already highly urbanized. Shanghai has four times as many people as New York City. Twelve cities in China have more people than New York City.

 

China’s first reaction to these trends has been to slowly raise their low retirement ages over the next 11 years. For men, the retirement age is being raised from 60 to 63. For women, from 55 to 58 for white-collar workers and from 50 to 55 for blue-collar workers. A related reason is that the public pension costs are “squeezing” government budgets. The long-run effect will probably be slowing down the fall in the size of the labor force as Chinese will have to work more years before retirement.


       The Economist, "Sunset Delayed," September 21, 2024, 38-40.


This policy will be very unpopular. Traditionally, families were multi-generational and children (daughters and daughters-in-law) were expected to care for aging parents. But hundreds of millions of the working-age population have migrated from rural areas to cities, leaving their children in the care of grandparents. A rising percent of women in the cities are working. If retirement ages are raised and grandparents in both the cities and countryside have to work longer, there may be less baby-sitting. This might lower the birth rate even more. In addition, China has strong age discrimination, so that the older population might have to wait longer between employment and receiving a retirement pension.


China’s Economy


There is massive excess capacity in many industries, including EVs and solar panels. Also steel and cement because of less construction. Local finances are in deep trouble since revenue is tied to land sales to contractors.


China’s economic development has been spectacular but growth is slowing down. The development strategy in the past was massive construction, both public and private, joint ventures with foreign companies, exports, and limiting domestic consumption. Internal construction, which includes housing, will probably be less important because of the huge amount of public infrastructure already in place. There will be little growth in housing construction because of low family formation and a large inventory of unsold apartments. 


China’s economy can continue to grow because of overcapacity and a large number of unemployed young people and college grads. The current strategy is to invest heavily in innovative new technology such as EVs, batteries and solar panels. Investment in these industries will come mostly from domestic sources. Besides these final products, China is developing and controlling their entire supply chain. China intends to dominate global markets in these products. Exports are rising but could face higher tariffs and quotas from trading partners.


To increase production quickly, China is stepping up exports. One area is autos.


China today has enough capacity to manufacture half of the world’s 80 million cars, or 40 million vehicles. Current production is about 26 million and rising. By 2030, China’s capacity could climb to 75% of the world’s volume.


Exports of cars are rising rapidly, to 6 million vehicles in 2023. (Total U.S. production is around 9 million, although American car companies assemble many cars in Canada and Mexico.) Besides autos with Chinese nameplates, foreign automakers are using China as the manufacturing base for exports under their own names. Foreign companies originally build large plants in China with Chinese joint venture companies to produce for the Chinese market. But falling sales in China have converted these plants to producing for exports.


Tesla shipped 344,000 China-built EVs to Canada, Europe and other markets in 2023. Volkswagen, Renault and BMW export made-in-China EVs to Europe. GM’s best-selling Chevrolets in Mexico are produced in China. Hyundai and Kia expect to sell 200,000 cars made in China back to South Korea and into global markets. Ford is exporting about 100,000 trucks and SUVs to Asia, Africa and the Middle East. Chinese joint venture partners make profits from these shipments.

BYD may export more EVs than Tesla this year. Huawei has become a major producer in only two years. Another startup, VinFast Pivot, says they will add a new car to their line that will be priced around $10,000.


This discussion of the Chinese auto industry is from Michael Dunne, “When Every Car Is Made in China,” The Dunne Insights Newsletter, May 7, 2024.


China dominates the global supply chain to produce EVs, from mining to mineral processing to production of battery cells. Some of the rare earth minerals come from rebel-controlled areas of Myanmar; China has supported these rebel groups.


The U.S. response is the Inflation Reduction Act to subsidize investments in EVs and battery plants. Supply chain plants are being built in Georgia, Michigan and North Carolina. Europe, like the United States, is considering much higher tariffs on Chinese auto imports.

All of this sounds familiar. China pursued similar strategies to dominate the global production of solar panels. At least 80%, some analysts say 90%, of global solar panel production is in China. To avoid high U.S. tariffs, some of Chinese solar panels are first trans-shipped to Mexico and Vietnam before entering the U.S.


The hukou System:  Illegal Internal Migrants


China has massive internal migration. It is governed by the hukou system, which has roots in Chinese history. 


In the hukou system, everyone carries a household registration card with the individual’s place of birth. More than half of China's population have a rural hukou. Individuals cannot legally change their hukou (official residence) without official approval. But China’s need for large amounts of labor in cities and industrial areas has created a demand for “illegal” migrants. 

The migrants have virtually no rights or legal protection. They have no access to social services, health care or education. Wages are often below the official minimum and they can be “deported” back to their home location at any time.


This creates an exploited underclass similar to illegal immigrants in other countries. The number of rural migrant workers in China may be as high as 300 million, comprising more than one third of the Chinese labor force. 


Rural migrant laborers propelled the extraordinary boom of China’s economy over the last decades but are still subject to discrimination and unfair treatment. Their children are often separated from their parents for years and raised by grandparents. The government is slowly improving the legal status of some rural migrant workers but fears that former rural migrants might lead to higher unemployment in the major cities.

Migrant workers also receive lower pensions than those registered as city residences. Hukoupensions are as low as $28 a month.


Nothing like treating a large part of your own native population like illegible immigrants.


Statista, “Migrant workers in China – statistics and facts,” June 3, 2024.  


Summary


Like Japan after their bubble collapse in the 1990s, China is facing adverse demographic trends, the collapse of a real estate bubble, excess capacity/high debt, and high youth unemployment.


While China’s future demographic path is like Japan’s, China is not like Japan in other respects. The big difference is that China continues to invest in cutting-edge technology. China will continue to be an exporting powerhouse unless tariffs and quotas begin to bite. But there are easy ways around most restrictions – trans-shipments and building plants in other countries. Because so much of the inputs that the United States and Europe need come from China, tariffs and quotas will probably be selective. Maybe mostly limited to EVs.


The future of China is a race to solve internal, domestic problems and continue to grow the economy through exports. In the longer run, the demographic collapse plus an aging population presents serious problems, although there are possible solutions. The solutions, which contain changes in political regime, will be more difficult if China continues to have an authoritarian regime for whom control is the main objective.


In the long run, China will have to move away from labor-intensive manufacturing. This implies much more automation and movement to the information economy. Also, Chinese companies can move some of their operations to other, low wage countries. But critically it means innovation; whether China can do this in a regime of political control of entrepreneurs is an open question.


For a summary of statistics from many sources and an excellent discussion of China’ current problems, see John Mauldin, “Broken China,” mauldineconomics.com, October 26, 2024.


For an excellent ongoing coverage of China, see The Economist at economist.com.  

 


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