China's Economy, Politics, and Demography
Introduction
China has been a spectacular economic success story. After the death of Mao in 1976, a more pragmatic group of Communist leaders seized power and began to change China. Their model was Singapore, whose population was mostly Chinese. Singapore’s economic growth model was that the dominant political party would direct economic growth. It invested in infrastructure, including condos for most of its population. It directed investment. It invited foreign companies to invest in the country. It became part of the global economy.
China did much of the same but since it is much larger, it had to go further. It liberalized agriculture, going from huge communes to allowing individual farmers to rent land. That doubled food production. Then it concentrated on manufacturing, with subsidies and favorable laws on taxation. Foreign companies were invited in but they had to partner with a Chinese company, which accelerated China’s absorption of foreign technology and management techniques. After combining low labor costs and modern infrastructure with the production and assembly technology of foreign corporations, China became a major industrial producer and exporter. But, unlike Japan at the same stage in the 1980s, China went further. The Chinese government’s strategic plan was to make Chinese companies the leading developers, innovators and producers of “cutting-edge” products. This included becoming the world’s largest producer of solar panels, batteries, and electric vehicles (EVs). As a consequence, China is the world’s largest exporter.
Summary of China's Current Economy
China has the second largest economy in the world. According to official statistics, it has the fastest growth rate of any industrialized country. But because of China's immense population, 1.4 billion people, per capita income is in the "middle-income" range.
State-controlled banks have lent $1.9 trillion over the last four years to build new factories and upgrade existing factories with robots and automation.
China’s BYD (BYDDY) sells more electric vehicles in the world than any other company, including Tesla. Half of the cars sold in China are electric vehicles (EVs) compared to 20% in Europe and 10% in the United States.
Contemporary Amperex Technology Co. Ltd. (CATL), the world’s biggest battery maker, accounts for 40% of the global market and continues to innovate game-changing technology.
America’s largest drone maker, Skydio, has made a total of 50,000 drones. China’s top drone company DJI likely pumps out that many every week.
China uses more industrial robots than the rest of the world combined, most produced in China. Continuing this trend, in 2023 China installed more industrial robots than the rest of the world combined.
China produces, installs and exports most of the world's solar panels.
China produces most of the world's "rare earth" minerals vital to the production of batteries and many of America's advanced weapons.
The country has surprised the world with its rapid advances in developing AI models, including DeepSeek.
China has increased its share of global manufacturing from 6% in 2000 to 32% in 2024.
China’s Economy
China now has a manufacturing sector that is larger than those of the United States, Germany, Japan, South Korea, and Britain
combined. It produces some of the world’s most advanced technology in the “cutting edge” industries.
There is excess capacity in many industries, including EVs and solar panels. Also steel and cement because of less construction. China produces more steel than the rest of the world combined; the industry is currently in a recession because of less
housing construction. Construction in housing is being replaced by new construction of factories.
China is installing more renewable energy technology than any other country; the increase in the amount of electricity produced by solar in 2024 was greater than the total amount produced in the United States. But China is also the world’s largest producer of coal. Chinese cities have some of the worse air quality in the world. Coal production is not going down because of expanding demand for energy. But in the long run, China hopes to replace coal with renewable energy technologies.
China also relies on imported oil and natural gas, especially from
Russia. China is the world's largest producer, and consumer, of cars. The country is far and away the world's largest producer of electric vehicles (EVs). China is rapidly replacing gas cars with EVs. China's strategy is to replace imported oil with domestically produced EVs built with Chinese batteries and in the long run, have electricity generated by renewable sources replacing fossil fuels.
In 2024, half of the car's sold in China were EVs. For comparison, the percent in Europe is 20% and in America is 10%. China is also rapidly increasing exports of EVs everywhere except in the United States, where Chinese EVs are effectively banned, China is
becoming the dominant seller of EVs in the world.
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 relying on housing will be less important because of the huge amount of housing already in place. There will be little growth in housing construction in the future because of low family formation due to a very low birth rate, and the large inventory of unsold apartments. (See the section below - China's Housing Crisis - for details.)
China’s economy can continue to grow because of high levels of investment, overcapacity in new technology, and a large number of unemployed young people and college grads. The current strategy is to invest heavily in innovative new technologies such as advanced computer chips, AI, robotics, new drugs, EVs, batteries, and solar panels. China has the world's largest fleet of autonomous taxis. Investment in these industries will come mostly from domestic sources.
In addition to being the world's largest producer of solar panels and wind turbines, China is investing heavily in "green" hydrogen as a renewable resource. This is produced using electrolysers to split water molecules into hydrogen and oxygen. China already produces about 40% of the of the world's electrolysers. The country is building pipelines from production centers to industrial centers such as Shenzhen, which already has a fleet of buses powered by hydrogen.
China is catching up in areas of chip production. The country has rapidly improved its chip technology; it can now produce all but the most advanced chips in the world. U.S. bans on selling advanced chips to China is less effective than it would have been in the past. There is a thriving black market in Nvidia's advanced chips.
China has employed its advanced chips to develop AI models such as DeepSeek, which are already almost as good as the most advanced American AI models.
Besides these final products, China is developing and controlling their entire supply chain, using its superb transportation and distribution infrastructure. China intends to dominate global markets and the supply chain of advanced foreign producers.
China is the largest or one of the largest producers of “rare earth” minerals needed as inputs to make EVs and other high-tech products. Some of the rare earth minerals come from rebel-controlled areas of Myanmar; China has supported these rebel groups. Chinese companies have been buying up mineral producers in other countries. China has the most advanced technology to purify and process the rare earth materials.
In retaliation to the threat of higher American tariffs, Chinese has banned the export of some “rare earth” minerals to the United States.
Exports are rising but are facing higher tariffs and quotas from trading partners, especially the United States. Export growth will probably come from countries in East Asia, South America and Mexico, and Africa.
Net Foreign Direct Investment (FDI) is probably negative - foreign firms are taking more money out of China than new investment going into China. Again, wealthy Chinese are smuggling large amounts of their wealth out of China.
Like almost all other countries, China runs a yearly fiscal deficit. The amount is opaque because much of it is incurred by city and
provincial governments promoting new factories. Local finances are in deep trouble since revenue is tied to land sales to housing developers and contractors. Total government debt/GDP is estimated to be around 120%, higher than even the United States.
Political Control
Foreign companies don’t vote and Chinese companies are expected to follow Party directives. The government controls much of the financial sector so it can direct loans to favored companies and favored industries. Local governments often provided land and buildings for new plants. But huge social media and e-commerce companies were not like manufacturing companies; their owners and managers started to act too independently for the Party’s taste. In addition, the Party feared, with some justification, that social media could become an uncontrolled outlet for independent thinking and writing. Even worse, social media could become the outlet for criticism of the government.
In the 2010s, the Party under Xi began to crack down. The most successful and famous entrepreneurs were reigned in. Communist Party cadres were installed in all large companies, with veto power. The government closely monitors the Internet and closes down sites that annoy them. Any dissent or criticism of the government is quickly repressed.
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. The Party sees them as an actual or potential threat. All individuals and their behavior are monitored and rated; a low score can have bad consequences.
A member of Communist Party is planted in every large corporation, and many smaller 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.
China’s Housing Crisis
In the past, investment in housing has accounted for about 20% of China's spectacular growth.
Housing construction will be a less important source of economic growth, partly because of the massive investment over the last 40 years and the huge number of unsold and empty apartments.
A large part of foreign investment in housing was from Southeast Asians speculating in apartment condos. There are 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. The latest estimate (November, 2024) is that the number empty apartments is around 49 million.
Domestic and international investors in empty apartments are now losing money as apartment prices fall.
About 20 million families put down payments of up to 50% on housing that has not been built or is unfinished. Some of these units may never be built. And yes, it was a Ponzi scheme. Many Chinese developers have gone bankrupt. The Chinese government has some small programs in place to limit the damage, worried that the anger may be directed at the government.
China’s Automobile Industry
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. (Total U.S. production is around 9 million, although American car companies assemble cars in Canada and Mexico.) Over half of Chinese production is now EVs. China’s electric vehicle companies continue to build new capacity. By 2030, China’s capacity could climb to 75% of the world’s volume, most of it EVs.
American car companies in China have falling sales and are losing money. In the past, General Motors and VW were the largest car producers in China. Now they are not even in the top 20. One reason is that half of all cars sold in China are electric vehicles, almost all of which are produced by Chinese car companies. General Motors just took a $5 billion write-off of their investment in China. Michael Dunne, an observer of the Chinese auto industry, believes that the position of foreign auto producers can only get worse and some, including General Motors, will eventually leave China.
When Volkswagen opened a huge electric car assembly plant last year in Hefei, China, it ordered just one robot imported from Germany. The company bought the other 1,074 robots from a factory in Shanghai. VW intends to source all of its parts in China.
Volkswagen has also moved its R&D from Germany to China, hiring 3,000 Chinese engineers. The China factory will be the source of VW EVs sold in Europe. At the same time, VW announced a massive cost-cutting program in Germany and the rest of Europe.
To increase production of electric autos quickly, China is stepping up exports. Exports of electric vehicles are rising rapidly, to 6 million vehicles in 2023 and maybe 9 million vehicles in 2024. 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 gas cars for the Chinese market.
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.
BYD, China’s largest EV producer, may produce more EVs than Tesla this year. Chinese EVs companies team up with Chinese large electronics corporations to install "wizzy" electronics and "infotainment" systems in their vehicles. Huawei, Chinese huge producer of smart phones and other electronics, has become a major EV producer in only two years. Chinese EVs producers are negotiating to set up assembly plants in Asia and South America.
This discussion of the Chinese auto industry is mostly 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 of rare earth mineral to the production of battery cells.
Chinese Exports and the Trade War with the United States
An American company called Skydio produces drones for the U.S. military and police departments. It is the largest producer of drones in the United States. For obvious reasons, all of its global supply chain is outside China. Except batteries; it is forced to buy imported Chinese batteries, a global industry dominated by China. As part of the trade war, Chinese used a new law, the Anti-Foreign Sanctions Act, to cut off Skydio from Chinese batteries starting in November, 2024. China produces more drones in one week than Skydio produces in a year.
China is the world’s largest producer of EVs, batteries, and solar panels.
The United States has expanded its ban of sales of hi-tech products, especially advanced computer chips, to China. China is retaliating by rapidly improving and increasing its domestic computer chip industry. Four key Chinese trade associations have recently told its members to stop buying American chips.
How much China has improved its chip technology will be seen by the new operating systems Huawei is unveiling on its new smart phones. Huawei intends to challenge the operating systems of Google (Android) and Apple (iOS), which are used on almost all Chinese smart phones. Huawei’s new phones are based on advanced chips made in China. As part of the Chinese government’s strategy to become self-sufficient, it is beginning to ban the buying of foreign phones (read Apple) by government agencies. As the trade war intensifies, there will probably be more internal bans on the usage of American chips and smart phones.
This is part of a concerted effort of China to increase its Research and Development. For example, Huawei has completed a new research center for 35,000 engineers. It is ten times larger than Google's R&D center in Silicon Valley.
Besides domestic companies, responding to Xi Jinping’s exhortation for “high-quality growth,” many foreign companies have increased their R&D in China. They include VW, Bosch, Bayer, AstraZeneca, HSBC, and global pharmaceutical companies. Total corporate R&D spending is now equal to that of Europe. On the other hand, some foreign companies, including Microsoft, are closing their R&D operations in China in anticipation that the trade war between China and the United States will become worse.
The American Treasury Department has circulated a draft “that would ban American firms from investing in AI, semiconductors microelectronic and quantum computing in China.” (The Economist, “Research developments: China is the West corporate R&D lab. Can it remain so?”, July 20, 2024, 49-50.) Both countries see that future economic growth will depend critically on developing new technology.
For decades, China has fairly consistently sold about $4 worth of goods to the United States for every $1 worth of goods that it buys. That imbalance partly reflects Beijing’s many tariffs and informal limits on imports, as well as an enormous government effort during three decades to replace imported manufactured goods with domestic production.
Sino-American trade has grown rapidly in the past. So the lopsided ratio has translated into a large American trade deficit. But the growth in U.S. deficit from trade with China has slowed down. The deficit has been in the range of $300 billion - $350 billion in the last four years. What has changed is that China’s trade surplus with the rest of the world has gone from near $0 in 2018 to about $450 billion in 2023.
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 higher tariffs on Chinese auto imports. German auto companies are fighting this because many of the EVs they intend to sell in Europe will be produced in China.
China has more to lose than the United States does in a trade war. But it is not obvious how high tariffs will affect China. In the past, domestic U.S. producers of substitutes for Chinese imports like solar panels have gone bankrupt or not been able to produce enough to hurt Chinese imports. Also, it will be difficult to find substitute sources for many industrial products in other countries. China has a deep, integrated supply network and a superb transportation infrastructure.
The net result might be some increase in U.S. manufacturing, a lower trade deficit with China, and higher prices for many goods in America. But the U.S. will still be very dependent on imports for industrial inputs, solar panels, batteries, and many consumer goods.
In light of threatened American tariffs on Chinese exports to the U.S., Chinese companies have set up subsidiaries in many other countries, especially in Asia and maybe Mexico. While this may reduce America's trade deficit with China, depending on how China retaliates, America’s overall trade deficit will probably not go down very much, if at all.
Demographics
China’s most serious long-term problem is not U.S. trade policy and tariffs. It is the projection of a huge decline in total population, particularly in labor force age groups.
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.
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 1970s. Birth rates were below replacement (an average of 2.1 children per woman) during the "one child" period of the 1970s to 2015 was about 1.5. They are even lower now, about 1.1 children per woman. This is one of the lowest birth rates in the world.
China 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 at present, 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 in work force age groups 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 40% 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.
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 slowly 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. Chinese economists believe that public pension funds will run dry over the next 10 years (sound familiar?). The long-run effect might 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 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.
A Complicated Story: Chinese Demographics and Housing
There are tens of millions more males than females of marriageable ages. This is due to large-scale abortion or infanticide of females during the "one-child" period of 1979-2015 (and possibly beyond) as male children were valued more highly than female children. Now supply and demand has reared its ugly head. Many women now demand a diamond engagement ring; China is the largest market for diamonds. In addition, there are expected male "dowries." The families of prospective grooms are often expected to buy the married couple an apartment. Some relatively prosperous parents in the past planned ahead and bought apartments for sons at low prices. Since 2015, housing prices have doubled and then fell about 20-30% from the top. Still, down payments are about 10 times the average urban wage. So, unfortunate sons cannot marry or they and their families must save for many years for a down payment.
This is one reason why there are so many empty apartments in China; they are a form of savings.
Worse, many young men, especially recent college graduates, cannot find a decent-paying job. Many are forced to take menial, low-paying jobs or move back home with their parents. They are not desirable prospective husbands.
Summary
Like Japan after their bubble economy collapsed in the 1990s, China is facing adverse demographic trends, the collapse of a real estate bubble, excess manufacturing capacity, and high and rising public debt.
While China’s future demographic path will like Japan’s, China is not like Japan in other respects. The big difference is that China continues to invest in new, cutting-edge technologies. Industries like EVs, batteries, computer chips, pharmaceuticals, and solar panels drive economic growth and exports. Unlike Japan, China has invited in foreign companies with needed capital and technology. They are not as needed as in the past. China will continue to be an exporting powerhouse unless tariffs and quotas begin to bite. But there are ways around most restrictions – trans-shipments and building plants in other countries. Because so many 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, solar panels and high-end computer chips and software.
The future of China is a race to solve internal, domestic problems and continue to grow the economy through investments in import substitutes, new technology, and exports. In the longer run, the demographic decline plus an aging population presents serious problems, although there are possible solutions.
The current regime has rejected all but small increases in China's pitifully low pensions, starting at $17/month. The solutions 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 continue to move away from labor-intensive manufacturing as a source of growth. The huge investment in robotics and factory automation is a step in this direction. This trend may intensify as the long-run demographic trend of fewer workers leads to higher wages. This implies much more automation and movement to the information economy. Also, Chinese companies may be able to move some of their operations to other, lower wage countries, which are the primary source of increased exports. But critically it means innovation; whether China can continue to do this in a regime of political control of entrepreneurs and information 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 excellent ongoing coverage of China, see The Economist at economist.com.
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