Is China's demographic outlook a problem or opportunity?

The expected population decline may be a good thing

I saw a tweet by Lisa Abramowitz the other day pointing out that China’s population is rolling over and expected to decline materially in the next few decades. She included a chart a lot like this one (it may have been this one, for that matter).

For most countries, declining population is a threat to economic growth and poses serious issues when the ratio of working population to retired population declines as it has in United States and Canada. Health care, pensions and retirement support for the elderly by governments is pretty hard to fund when the working age population is significantly smaller than the retired population, a problem Canada faces in spades where that ratio has fallen by half in just one generation and is falling further yet, as set out in this chart from an article published by the Fraser Institute.

This is the chart for Canada

With Trudeau’s inept government doubling the national debt both to support people during COVID and to fund his pet projects, health care and retirement support for the elderly will compel much higher taxes and more borrowing. That picture is dire for Canada’s economy without major productivity improvements, but Canadian productivity is falling under the weight of oppressive federal government policies that intervene in the market and see capital and R&D dollars go elsewhere.

While the picture is somewhat similar in China, it is not as severe with the working age population still a multiple of the over 65 crowd and the total population likely to fall from about 1.4 billion people today to around 1 billion in 75 years.

Unlike Canada, China has invested massive amounts of money in infrastructure, industry and R&D, with the country’s research and development spending now second only to the United States. That points to higher productivity offsetting the shifting demographics. China’s capital investments have consumed a major share of its GDP, a fact pilloried by Western economists who see the spending as wasteful and unprofitable and a misallocation of capital.

I see it as far-sighted and wise. While Western economies have a housing crisis driven by foolish policies that drove down interest rates (e.g. Quantitative Easing or QE) and limited homebuilding resulting in unaffordable housing and growing homelessness, the Chinese have built over 700 billion square meters of residential construction in the past decade or two and are estimated to have 89 million vacant homes.

From the perspective of failing developers like Evergrande, that looks like a problem but for Chinese looking to buy a home it spells opportunity and unlike Canada, Chinese home prices are falling.

What builders describe as a “slump” home buyers describe as a boon.

I see many problems in China both for its domestic economy and for its impact on the world economy, but one scenario that makes sense is for China to enjoy growing per capita income arising from the investment it has made in capital and R&D, and the ability to manage a declining population with higher personal consumption and sustained economic growth. In my opinion, it is possible that China (which already has a larger economy than the U.S. on a purchasing power basis) will surpass its Western rivals in the household income of its citizens, avoid the homelessness that plagues United States and Canada, and in relative terms enjoy a boom while Western economies lag.

When the dust settles in that scenario, China will still have a robust economy with more than double the population of United States and fewer of the social problems created by leftist adminstrations. We are quick to criticize China but need to keep our minds open to the possible outcomes rather than incessantly claim our policies will prevail in the economic wars of the future.

China is likely to benefit from its demographic trends, emerge as an even stronger economy, and become more powerful as a geopolitical force. Western leaders need to stop being dismissive of the rise of China and over-confident in their own policies, which in leftist Canada and U.S. have been destructive to international competitiveness worsened by squandering resources in a senseless effort to alter nature by claiming CO2 causes climate change while China makes good use of fossil fuels to expand its power. You would almost think Biden and Trudeau want a Communist world order?