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China’s Generation of Demise

Why China’s shrinking population both reflects—and portends—far deeper problems.

By Richard Vague

On January 17, the National Bureau of Statistics announced that in 2022 China’s total population fell by 850,000 to 1.41 billion, its first such decline in 60 years. This is no surprise to those who have been paying attention, since its population has long been aging and the United Nation’s standing forecast shows China’s population shrinking to 1.3 billion people by 2050. With the 2022 data in, even that number now looks too high, and with the current and projected dearth of women of childbearing age, the population trend is irreversible and will only accelerate.

Economic growth is partly a function of population growth, so the announcement that China’s economy expanded by a mere 3 percent in 2022, in sharp contrast to the 7 percent growth it averaged in the five years before COVID, was also unsurprising. Apart from the brief 2020 pandemic collapse, this was China’s lowest growth rate since 1976.

Rapid economic growth solves economic problems, and slow economic growth exposes them. China already has an egregious overcapacity problem in a number of sectors, especially real estate, with perhaps as many as 100 million unsold or unoccupied houses and apartments and trillions of yuan (hundreds of billions of dollars) in now unserviceable loans made to build those houses and apartments. A population collapse further entrenches that problem, and China’s real estate industry, which has been a vital engine of its growth, is now destined to shrink over the next generation.

China’s population trends are bad enough, but its problems go much deeper, and it will struggle to regain and consistently maintain its pre-COVID growth rate. This is not the mild sort of reversal that problem-solvers can fix by putting their collective shoulder to the wheel for a couple of years. China’s problems are structural, deeply embedded, and all but irreversible.

I’m not given to hyperbole, but what we are seeing could very well be the slow-motion dissolution of the country in its current form over the next few decades, with civil unrest morphing into political discord and the likelihood of assaults on the very form and leadership of its government.

First and foremost, China achieved its 7 percent growth rate primarily through rampant construction of housing and other real estate, but that simply yielded those estimated 100 million empty homes and apartments across the country—it now has more empty dwellings than most countries have in total dwellings.

The most visible perpetrator of this insanity was a company called Evergrande, now familiar to most readers due to its massive, headline-grabbing debt default in 2021. But the entire homebuilding industry in China, including companies such as Kaisa, Fantasia, and the Shanghai-based Shimao Group, soon followed suit, and the trouble has now cascaded to hundreds more developers, raw material suppliers, and contractors.

These companies had been able to overbuild because their lenders, primarily China’s banks, used exceedingly lax criteria in making loans. However, in 2020, China’s government, worried about both the housing excess and the overleveraged state of these companies, imposed much stricter lending criteria—its now-famous “three red lines” policy—that many of these companies could not meet. So the banks had to deny these companies any further loans and their new construction efforts ground to a halt, adversely impacting China’s economic growth.

During this construction boom, China—the second-largest economy in the world—racked up a business debt level of 157 percent of GDP, the highest among the world’s major economies and up from 94 percent during the Great Financial Crisis of 2008. In comparison to this stultifying debt level, the United States has a much lower 81 percent, Japan (the world’s third-largest economy) has 117 percent, and Germany (fourth-largest) has 72 percent. The largest component of China’s business debt is real estate loans.

Here’s the dilemma: China can’t have it both ways. When the state restricted lending, both new construction and the country’s overall economic growth quickly slowed. If China’s government were to remove these restrictions, new construction would resume and the country’s growth would benefit (since GDP increases whether or not the home is sold). But this move would simply add to the excess of unsold real estate and create yet more loans that will never be repaid.

A Wall Street Journal headline in late 2022 concisely summarized the Hobbesian choice: “China Dials Back Property Restrictions in Bid to Reverse Economic Slide.” The government had imposed restrictions on banks’ real estate lending capacities but then saw the resulting adverse impact, flinched, and unwound many of the restrictions by giving lenders overt permission to extend loans to home builders in financial trouble. Yet there is only so much increased building China can do when so much excess already exists. And the last thing it can afford if it wants to sustain real estate growth is a population decline.

China’s growth was also temporarily challenged by its draconian erstwhile zero-COVID policy, which required factories, cities, and even entire regions to shut down if cases of COVID were discovered. These shutdowns smothered growth and irreparably damaged millions of households and businesses.

One other major factor is impeding China’s economic growth: the decoupling of the economies of China and the United States. For the last two generations, China’s focus on manufacturing and low wages has made it the premier choice for manufacturing outsourced from the United States and other major industrial countries. Almost all of Apple’s iPhones are made in China. But the rapidly deteriorating political relationship between the United States and China means that many companies are now either reshoring manufacturing back to the United States or moving it to countries such as Vietnam, Turkey, and Mexico that are much less politically risky. Some companies fear that access to their manufacturers in China could be completely cut off and leave them without products to sell. That risk is simply too high, regardless of the cost differential.

A political rapprochement between China and the United States will not diminish that risk, and in any case would almost certainly be temporary. Given the magnitude of challenges it faces, China may increasingly seek rapprochement. But U.S. businesses have now seen what can happen and viscerally understand the risk. A business with all its manufacturing in China might well fail if the door between China and the United States slams shut, even for a few months.

As part of U.S.-China decoupling, the United States took an action in October 2022 that, although little noticed, may have been the most significant in the history of the U.S.-China relationship. It introduced a sweeping set of export controls that effectively banned Chinese companies from buying advanced microchips and chip-making equipment from the United States, and also effectively banned American citizens and green card holders from providing support for the “development or production” of such chips in China. This has already led to large-scale resignations of top American executives and core research staff working at Chinese chip firms. The United States is asking all other advanced chip manufacturing countries, such as Japan, to join this ban.

China has long manufactured low-end microchips, but it does not yet have the capability to manufacture high-end chips, which are vital for most of the industries that are key to China’s economic future and in which it has declared a goal of global leadership. These industries include supercomputing, weapons, artificial intelligence, and 5G and 6G wireless.

This ban is therefore a devastating, industry-crippling blow, and manufacturing these advanced chips is a daunting technical challenge that will take China years to overcome. The ban is all but unprecedented, since historically these measures have been reserved for “rogue regimes” such as North Korea.

Given the troubles in its real estate and high-tech sectors, perhaps China’s households could shoulder some of the burden of creating growth. However, the inconvenient fact is that, since 2008, households have increased their level of debt from a mere 19 percent of GDP at the start of the 2008 global financial crisis to 62 percent of GDP in 2020, a level approaching household debt in the United States. (In contrast, over the same period, U.S. household debt declined from 99 percent to 80 percent of GDP.) If China’s rapid increase in household debt continues at this pace for just a few more years, it will reach the highest level of any major country, which will mean that households will have their own demons to wrestle with and, hence, limited capacity to save China from decelerating growth.

All of these factors combined will result in an ongoing shift to slower growth. Inevitably, China will seek to offset slowing growth with increased central government spending, and it will succeed to a limited extent, perhaps even attaining the levels of the past for a short period, but not enough to restore consistently robust growth. Since China’s growth has had an outsized impact on global growth, its deceleration will also put downward pressure on global growth. In the years leading to COVID annual global growth was 3 percent, but without China it would have been a much lower 2.4 percent.

What could lead China out of its troubles? Not the real estate sector, not the tech sector, not households, and not trade. China’s options are disappearing, and the risk of political unrest is growing, with ever rising counts of protests and riots. Until the population decline in the 1990s in beleaguered Russia and more recently in countries such as Japan and Germany, no major country had had to face that issue since the dawn of the Industrial Age. For China, this population decline will only accelerate. There is no playbook.

It may seem surprising to foretell the dissolution of China over the next generation in light of its widely heralded ascension over recent decades and President Xi Jinping’s political triumphs. But with an accelerating decline in its population, the world’s largest business and household debt burdens, and formidable obstacles to its business progress, it now faces more daunting challenges than any of the world’s other top economies. What might the dissolution of China look like? Increased political unrest and riots, at the very least. Higher levels of repression. A much greater buildup of its military. More parading in the cloak of nationalism. And then worse.

Some argue that slowing population growth is good news, especially with respect to the environment. I would not disagree as regards the environment and perhaps other factors, but China’s government has staked its legitimacy on providing an increasingly better economic quality of life for its citizens, and slow growth will thwart that ability.

Incidentally, China is not the only country grappling with population issues. The entire developed world is experiencing decelerating population growth, with some countries, as noted, seeing outright declines. They too will have the Sisyphean task of posting economic growth in that context. (Population growth in the United States, although decelerating, looks favorable in comparison to most other developed countries.)

All of these factors lead to two troubling conclusions: The world has entered an era of slower growth, and China has entered an era of unprecedented economic challenge and intensifying political risk.

Richard Vague is the author of An Illustrated Business History of the United States, The Case for a Debt Jubilee, and A Brief History of Doom. He is managing partner at Gabriel Investments, former Secretary of Banking and Securities for Pennsylvania, and former CEO of Energy Plus, Juniper Financial, and First USA Bank.

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