Monday, December 18, 2017

China's Growth Story...Don't Look For a Happy Ending!

Many economists suggest China is on the cusp of significant growth in domestic consumer demand as China shifts from exporter to consumer.  These economists postulate that rising domestic demand coupled with continued growth as the global exporter will push both China and the global economy into higher gear.  China itself suggests that it will achieve 6.5% annual GDP growth.  However, I'll briefly show why these outcomes are simple fantasy unless China somehow succeeds in essentially unlimited and unprecedented credit growth over the next decade.

Problem #1- China as Consumer:

According to the UN data, China's 15 to 40 year old childbearing population peaked in 2005 and has been rapidly shrinking since.  Since 2005, China's population capable of producing more Chinese has fallen by 83 million persons or a 14.3% decline.  By 2030, China's childbearing population will have declined by 157 million or a 27% reduction of those capable of childbirth (no estimate here...this is simply moving the existing population forward in adulthood).  Couple a massive decline in the childbearing population and the ongoing negative birthrate and serious depopulation (particularly among the rural regions) is not only possible but growing more likely.  Minor increases in wages will be no match for the massive declines in the consumer base.

The chart below shows China's total 15 to 40 year old population (in blue) and the annual change (in red).
As for China's 40 to 65 year old population, peak annual growth is well in the rear view mirror but one final bump in population growth remains before depopulation ensues.  However, the mild acceleration in growth will be more than offset by the declining 15 to 40 year olds (chart below).
Simply put, China has seen peak domestic consumption and peak demand.  The impact of large, growing declines in the consumer base are only being masked by massive central monetization and wasteful misallocation of resources (chart below showing debt, GDP, energy consumption, and 25 to 54 year old Chinese population).

That misallocation has resulted in China's massive surge in energy consumption.  The chart below highlights China's growth in total energy consumption as a % of global growth, by period (detailed HERE).  Absent China's massive overreach, the world is decelerating at an alarming rate.  Red flags should be waving in China and globally as a slowing export market and shrinking domestic marketplace coupled with massive overcapacity are now colliding for China.

Problem #2- China as Exporter:

Where will China continue to grow its exports?  The primary importers of China's goods are the developed nations (N. America (US/Canada), Europe (including Russia and Eastern Europe), Australia/New Zealand).  These nations represent roughly one seventh of the world's population but consume over half of all the worlds oil the bulk of all China's exports.  But here again I have the same problem; developed nations combined childbearing population peaked in 1988 and has been declining since (chart below).  The population of developed nations capable of childbirth has fallen over 40 million or nearly <10%> since the 1988 peak.  By 2030, despite many of these nations allowing, promoting, and/or enduring large immigrations of precisely this age of migrants, the population is anticipated to be 60 million fewer than during the peak, or a <15%> fall.  The basis of present and future demand growth simply is non-existent.
As for the US, the chart below shows the anticipated US change to the childbearing population.  However, as I detailed HERE, actual US childbearing population declined in 2017 apparently due to net outmigration of illegal aliens.  Obviously, if this trend continues, then the US has likewise seen peak childbearing population coupled with negative birth rates leading to potential significant US depopulation.
As for the change in the combined 40 to 65 year old N. American/ European / Japanese / Australian / NZ population that has the highest income and spends well in excess of any other population segment...they hit peak population in 2016 and are now declining.  Although the chart below is only through 2030, the decline really picks up speed from 2030 through 2050.
What about India and South Asia as a replacement for the shrinking consumer base of developed nations above?  As the chart below shows, the growth of the combined childbearing population of South Asia (India, Pakistan, Afghanistan, Iran, Bangladesh, Sri Lanka, Nepal) is rapidly decelerating.  Annual growth peaked in 2000 and has decelerated to 8 million as of 2018.  By 2030, growth among these nations childbearing population will essentially cease.  Minimal disposable income coupled with the decelerating growth in the potential consumer base...not what China is looking for.

Perhaps a glance South of the US border is worthwhile.  However, the same dynamics of a fast decelerating annual growth and turn to outright depopulation by 2030 is visible for the combined South American, Central American, and Caribbean region (chart below).
Finally, the only region with accelerating childbearing growth is Africa (chart below).  Unfortunately for China, Africa has hardly any money, little savings, and relatively paltry access to credit (Africa's situation detailed HERE).  Regardless the incredible population growth, Africa is not and will not likely ever be a significant importer of Chinese goods.
Depopulation means a declining consumer base domestically in China and globally among those capable of importing Chinese goods.  Millions fewer potential Chinese homebuyers/renters for a nation awash in speculative excess housing.  Without China's debt fueled "growth", the global economic deceleration and obvious overcapacity of nearly everything is plainly visible.

But don't expect asset prices to fall or economic indicators to  suggest things are falling apart.  Quite the opposite, the worse the fundamentals get, the higher asset prices are likely to be "managed" all around the world in the new centrally guided mother of all asset bubbles.  This bubble isn't likely to end in a market correction like '00 or '08.  Instead look for social or geo-political upheavals the world over as a means to conceal the true issues while scapegoating will almost surely be utilized to promote military conflict rather than structural reform.