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Home > Blogs > Anthony Harrington > Betting against China – Part 2

Betting against China – Part 2

Chinese economy | Betting against China – Part 2 Anthony Harrington

One of the key reasons why some fund managers are starting to bet against China is that food prices across the country have surged by between 20% and 35% through 2010, although overall measures of inflation are still modest. The official Chinese account puts inflation at 4.4% through October 2010 and China is officially targeting 3%. With essentials like grain, however, that inflation target is meaningless. The fear is that food prices rising this sharply will create turmoil on the streets regardless of how low the “official” inflation figure is said to be. 

Another concern is that it is entirely possible, even probable, that the true extent of loans to local governments and state entities has been massively under reported. The anxiety here is that a number of banks are effectively at or near “zombie” status and will create a Japan-like drag on the economy. Ambrose Evans-Pritchard says that a recent study by Fitch Ratings, carried out jointly with Oxford Economics, looked at what would happen if China’s growth slowed to under 5% in 2011.

The logic of looking at such a low figure is the contention that China’s mercantilist approach, with high growth being predicated on ramping up exports through cheap loans and an artificially weak currency, has come to the end of the road.

The Fitch/Oxford Economics study predicts that the result of this kind of crash would be:

“... a 20% fall in global commodity prices, a 100 basis points widening on spreads on emerging market debt, a 25% fall in Asian bourses, a fall in the growth rate of emerging Asia of 2.6%, with a risk that toxic politics could make matters much worse.

"It is sobering that even a slight cooling of China’s credit growth led to economic contraction in Malaysia and Thailand in the third quarter, and sharp slowdowns across Asia. Japan’s economy will almost certainly contract this quarter.”

Then, of course, in the medium term, too far off for a fund manager who was shorting China today to stay solvent long enough to benefit from, there is the awesome problem of China’s demographic issue. Reducing the population of the most populous country on earth by 50% with the “one family one child” slogan might have seemed like a brilliant way of reducing the scale of the people problem facing China’s central planners, but its legacy is going to be a frighteningly large imbalance between youth and age in China.

This was always going to be the inevitable outcome of China’s “four grandparents, two parents, one child” policy. It is a shame that China’s planners never faced up to the question of where, exactly, that policy was going to leave the country 50 years on.

As long ago as November 2005 David Willet wrote a very perceptive article on China’s demographic challenges, published in the Financial Times and substantially reproduced on The New Economist website. Willet looks at the impact of the drive in China through the 1960s and 1970s to reduce infant mortality (itself a consequence of limiting couples’ ability to have children, which hugely incentivizes parents to cherish and seek to preserve the child they are allowed to have):

“…(this) is now yielding a surge of young workers – an extra 10m working-age adults per year. China’s challenge now is just to absorb them into the labour force. Add to that the massive population flow from the countryside and you can see why wages are low and growth is so fast. There are few pensioners, and there are not many children either. China is at a demographic sweet spot.”

However, all is about to change. As Willett notes, by 2015 the expansion of China’s working age population is due to go into reverse. More startling is his next point: “By 2040, today’s young workers will be pensioners – in fact the world’s second largest population after India, will be Chinese pensioners.” He cites Richard Jackson and Neil Howe’s 2004 paper “The Graying of the Middle Kingdom”, which points out that by 2040 there will be some 100 million Chinese over the age of 80.

One of the reasons often given for the difficulties faced by mature markets like the US and the UK is the ageing population. By 2050, Willetts points out that China’s median population age will have progressed from 21 in 1980 to 33 in 2010, reaching 45 by 2050, as against 43 for the UK and 41 for the US.

Robert Ash, writing for ISN Insights, an open source international think tank, takes 2050 as the date when India will overtake China as the most heavily populated country on the planet. He points out that according to the National Committee on Aging Populations, the number of people over 65 in China will reach 300 million by then, accounting for one fifth of the population.

What will the result of this be? Ash spells out the obvious:

“As this process makes itself felt, the burden of maintaining GDP growth and providing for the economic and social needs of increasing numbers of elderly, will grow more onerous. This burden will be all the greater, given that the workforce itself will be contracting, average per capita GDP will remain quite low and the elderly will live longer.”

Specialists in demographic trends are fond of referring to the elderly as a “non productive demographic investment” for the state. It may of course be that this turns out to be hogwash, and society – both Chinese and Western – may discover that the “elderly” are quite capable of being a lot more productive than today’s whipper snappers give them credit for. China’s 80 year olds could turn out to be an innovations powerhouse – I wouldn’t bet my house on it, but it’s possible.

Further reading on demographics and the Chinese economy:

Tags: China , Chinese economy , financial crisis , fiscal stimulus , GDP growth , global imbalances , inflation , international differences , Japan , regulation
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