The Chinese Demographic Time Bomb

                                 
                                               "Demographic is destiny"

                                                                                       ---August Comte


It is well known that the Chinese are growing old before they grow rich. They are not making enough babies to sustain the population. Most people, when they hear about this, go straight to the lost of labor and declines of the economy. Actually, the decline of the population does not have a big impact on the economy in the short term. The reason is productivity gain and economic growth occurs at a much higher rate compared to population decline. The population decline is also counteracted by lengthening of the life span and thus increasing the productive years left for each person. Increased life span also has the effect of increasing population size, at least in the short term.

Nor is liability for the elderly going to be a big issue for government finance. Unlike the United States with Medicare and Social Security, the Chinese government does not have formal agreements with the population to provide for the elderly with certain level of benefit. What is more, the elderly in China have seen a steep change in prosperity from when they grew up, and will be very happy with whatever benefit that they will get.

The imperceptible nature of demographic change makes it easy to mask titanic and dire changes until decades later, at which time it will long be fait accompli. Imagine a situation in which China cease to have any babies. Each year, the population would decreased by 1.5% or so. Since the kids would not even be productive until they turn 20 or 25, we won't see any change in economy for a while. Thirty years later, the entire nation has gone extinct, but there would still be six or seven hundred million souls walking about. In certain part of the country, you could still say that there is over population. At this time though, there would be some dramatic change in the economy. Work that require youthful physical labor would find it increasingly impossible to hire. The pool of old folks relative to the general population has shot up dramatically. Someone must care for them. Both of these situations hugely incentivize import of menial labor. The Japanese and the Koreans, who are currently at an advanced stage of aging, have resisted this urge. They are right to do so. Due to the nature of the work involved, the people thus imported will likely have significantly lower IQ compared to the native population. Just as the Hispanics in the United States, they will form a permanent underclass that will increase crime and contribute to the internal strife of the nation that import them.

The current Chinese total fertility rate(TFR) is about 1.5. This number is similar to the developed world in general. A TFR of 2.05 is required to maintain the population. However, the trend is ominous. The TFR for most Chinese urban areas is around 1 or less. Since the Chinese are urbanizing at a very fast pace, the national TFR will fall from 1.5 toward 1 as more and more Chinese move from rural areas to cities. At TFR of 1, the young population gets cut in half every generation. Unless China succeeds in getting young people in urban areas to have more babies, they will not be able to reverse this trend. So far, not a single country who see low TFR has the ability to reverse the trend. Without intervention to break the trend, China will zoom past Europe and United States to become some of the oldest populations in the planet.

On the positive side of the ledger, the Chinese starting out with larger number of babies. Among the high IQ population of European and East Asian countries, the Chinese gave birth to more than twice as many babies as the rest combined in 2016. There is still some time to fix this problem. If the government is able to find a solution to stabilize the population, they would pull off something that no other government could.

In the longer term, if China can resist bringing in low IQ immigrants, the low birth rate would eventually fix itself. That is because those who have babies by definition pass along their genetic and cultural attributes to the next generation, who would be more inclined to have babies in this urban environment. After many generations of weeding out the people who will not have kids, the younger generations will have a much stronger drive to reproduce, despite the urban environment that deterred others in the previous generations. The Chinese can accelerate this by allowing as many babies as anyone would like to have.

Longer term, demographic implosion is the biggest danger to the rise of China. The Chinese have some time to fix this problem, but the trend is unmistakable. The awful statistics of the other East Asian countries points to an ominous future. Hopefully, the Chinese can intervene and turn this around.

Potholes In The Paths of A Rising China

"The world is getting better, but not in a straight line."

                                                                              ---James P. Goreman

The rise of China has encountered many obstacles along the way, it was due to the intellect of the leadership and their ability to execute difficult decisions that the Chinese economy and society continues to grow and transform itself. What pot holes lie awaiting in the future?

The United States started the first salvo of a trade war with China today, but I am pretty sanguine that this wouldn't lead to a major setback for either country. Fortunately for China, their future is largely in their own hands. China still face many challenges in the future. In the economic front, they face the prospect of slower growth and the need to transition from an investment driven economy to a more consumption driven economy. In the security arena, having grown dependent on trade, especially raw materials to fuel economic growth, the Chinese must now protect the ever growing trade routes, both from the ocean and from land. On the diplomatic front, China faces the challenge all rising power faces. There is a great deal of fear, jealousy and push back against the rise of China from the established powers, particularly U.S., Japan and Western Europe. China also faces enormous environmental challenges still as they continue their industrialization. The Chinese government structure have not faced a challenge that is bound to come up in the future, namely how to govern in hard times. China had slowed growth from time to time, but never a prolonged recession since Deng took over. With all the corruption and abuse of power of some of the Communist party members, a new generation of people accustomed to an ever growing economy, would the government be able to handle hard times if and when it comes will determine if the country would fall apart or continue on its course. Finally, the looming demographic crisis on the horizon could threaten to severely diminish the prospect for China in the longer term.

Looking at the past track record of the government, I feel that China will be able to handle the economic transition. There are still enormous opportunities to add to the economy. The robotic revolution, which is just starting in China, will greatly accelerate productivity gains. There are still a lot of room to improve the infrastructure, like the Chinese version of the hyperloop, which will provide travel at faster than speed of sound at a tiny incremental cost. Urbanization, which greatly enhances the productivity of the urbanized inhabitants, is happening at a scale and compressed time frame never seen before in human history. A.I., which will greatly accelerate productivity in many industries, is happening at a very fast pace. The Hongqi River Project, with the potential to create a gigantic farming area out of the arid Xinjiang, is the biggest water project since the Hoover Dam. Hoover Dam diverted the Colorado River to make California a farming power house. Hongqi River project has the potential to do the same for China. An area that is barely habitable will now have enough water to host two hundred million people or more. Mechanized farming at huge scale, as practiced in United States and Canada, will now be possible in China. On the negative side of the ledger, the economy does contain some very serious imbalances that needs to be rectified. In the next decade, we will see some significant slow down if we are fortunate, or, equally likely, China may experience lost decades like the Japanese if the leadership fail to reform. I will discuss this further in a future post.

The growth of the Chinese military, which will be the topic for later posts, is progressing extremely well. This bodes well for their security and diplomatic areas. The Chinese have also grown much more adroit at diplomatic maneuvering. China still faces the Thucydides Trap as a rising power, but I feel that the leadership from both countries are smart enough to avoid a hot war. The fly in the ointment is Taiwan. The independent wing of Taiwan, feeling their prospect for independence ebbing away as China gets stronger, are feeling anxious. Egged on by Trump, who uses Taiwan as a bargaining chip, they are calling for a referendum to declare independence in 2019. This could trigger a war that at the end will not be in anyone's interest. Hopefully, cooler heads prevail to avoid a war.

While pollution is still a problem, they are being tackled by the government using many innovative approaches, like using nuclear power to heat homes. I feel that they have moved past the worst polluting era for China and the trend is good.

The government, like all governments in the world, has many problems. The current incarnation is still relatively new and untested. This in contrast to the United States government, which has gone through many challenges and is quite staple. Continue reform is still needed to fix many of the contradictions and inertia that still plague them. One can observe one of these through The existence of Tea House Scam in Beijing. For the uninitiated, the tea house scam is one of many scams that were on going in big cities like Beijing where tourists were fleeced out of hundreds or thousands of dollars by scammers. Given that this is happening for many years right in the capital of China, the police and other authorities must have allowed it, mostly because the part of the money that the scammers got went into bribes for the authorities. Scams have become one of the industries that enriched the CPP members in power. For the small money that the scammers got, this generates enormous ill will for China, yet it seems the authorities are unable or unwilling to stop such practices. One of countless issues to be fixed by more reforms in the future. The changes that were made thus far bodes well for them to continue to make reforms that would allow them to make progress on their system in the future.

The biggest issue in the medium term is demographics. Like all their East Asian counterparts and Western world in general, China's birth rate is significantly below replacement level. In the short term, the impact is still limited. In the longer term, the impact could be quite catastrophic. The problem of population implosion is now a major issue with Japan, Korea, Taiwan, Singapore, Western Europe and the White population in the United States. So far, no country has found a way to reverse this problem. I will discuss this problem in my next post.