China enters the perfect storm

The 20th National Congress of the Chinese Communist Party was held last week in Beijing. Most of the reporting was focused on General Secretary Xi Jiping securing a historic third term as leader and consolidating his power. However, a much bigger story lies beneath and its one that will affect all of us.

For the past 20 years, Chinese leaders have said the country was in a “period of important strategic opportunity” and that “peace and development remain." However, with so many trends working against China, the government is warning of “dangerous storms” ahead. In reality, this country is entering the equivalent of a category 5 hurricane, which is largely driven by demographics. 

China now has the world’s largest population at around 1.43 billion, which is more than four times that of the United States. Its forecast to decline to 1.32 billion by 2050 and to 771 million by 2100. Despite efforts of the State to increase fertility, China's fertility rate dropped to 1.16 in 2021. This is far below the 2.1 OECD standard for a stable population and among the lowest in the world.

China will be roughly half its size by the end of this century, while the U.S. will be about a third larger

The United States, on the other hand, is expected to grow to between 423 and 458 million by the middle of the century before it plateaus. The U.S. birth rate, while low, is hovering around 1.7 and immigration remains relatively robust. This means that China will be roughly half its size by the end of this century, while the U.S. will be about a third larger. China, which four times the size of the U.S. today will be just over two times larger by 2100. India will overtake the top spot as the world's largest country by 2050.

The implications of China’s demographic decline will be one of the greatest issues facing it and the world in the coming years, and it won’t just be for the geopolitical instability that this shift will create in places like the South China Sea and the African Continent. China's economy is on a collision course with reality and the prospects of this nation are beginning to look dystopian.

This market will collapse and create an economic contagion that will spread around the world

China's economic expansion has largely gone unchecked since it was opened by U.S. President Richard Nixon in 1972. It overbuilt its housing stock by over 65 million units, which is enough extra housing to give everyone in the state of Texas a home, twice. This market will collapse and create an economic contagion that will spread around the world. It will make the subprime mortgage crisis in the United States, which contributed to the global financial crisis and the Great Recession look like the common cold.

China’s over abundance of labor, which has provided the world with cheap goods for decades is vanishing before our eyes. When labor markets contract, salaries increase, so since the beginning of its one-child policy in 1979, China's days of readily affordable workers were numbered. They are now at an end.

The percentage of Chinese above the retirement age is expected to reach 39 percent of the population by 2050 too. At that time, China's dependency ratio, which is the number of people below 15 and above 65 divided by the total working population, is projected to increase to 69.7%, up from 36.6% in 2015, and 49.5% in 2020. China can abate some of this pain by shifting the definition of working population and including older workers in its economy again.

To add salt to the wound, Western firms are moving out because of increased labor costs, which are driven to demographic shifts in the labor market, as well as increased threats to intellectual property and choke-holds on the supply chain. The trade measures are largely driven by the U.S. and its allies desire to block sales of semiconductors which are critical to the development of artificial intelligence, supercomputers, and other high tech. When taken together, all of these threaten to further stall China's economy.

All in all, this adds up to rough waters ahead for the Chinese economy and the world. The speed and size of China's demographic transition from a young country to an old one is unprecedented. Batten down the hatches.

To learn more about our demographic future and how it impacts your business, pick-up a copy of The Super Age: Decoding our Demographic Destiny today.