The Most Important Number China Needs to Worry About

Suddenly, China is a mess.

The Shanghai Stock Exchange Index is down 14% this year, and down by more than a third over the last three years. It trades lower today than it did in early 2009, when the global economy was nearing collapse.

Manufacturing, long China's engine of growth, is now contracting. Imports are down. Economists around the world are cutting their forecasts of the country's economic growth.

China's banking system is straining, too. Interest rates tied to interbank lending surged to more than 20% last week as a credit crunch emerges after years of binging on debt.

How will this end?

We really have no idea. China's economy is heavily controlled by its government, and -- importantly -- much of its banking system is state-owned. Financial crises are usually triggered by a lack of confidence among investors. But if your main investor is a government agency indifferent to losses, the playbook is very different.

I'll make a long-term guess, though. Twenty years from now, we will look back on China similarly to how we now look back on the Japanese economy of 20 years ago.

The two stories have an uncanny similarity: Investors holding an unshakable amount of optimism while ignoring massive demographic problems.

Japan was the envy of the economic world 20 years ago. Economists gushed. Businesses were wooed. Even author Michael Crichton wrote in 1992 that, "Sooner or later, Americans must come to grips with the fact that Japan has become the leading industrial nation in the world."

It didn't turn out that way. Why? Mostly because the Japanese population got too darn old. It's nearly impossible to grown an economy when retirees grow faster than the workforce, which is what happened in Japan. Most of those who became dewy-eyed at Japan's prospects 20 years ago missed this completely. The result has been two decades of stagnation.

China could suffer a similar fate.

China has a lot going for it: More than a billion people, cheap labor, efficient manufacturing, and a culture of ambition.

But because of its one-child policy, the country is getting old. Really old. Its working-age population went into decline last year, just when its economy started slowing down.

According to Census Bureau data, working-age Chinese (those age 15 to 64) currently make up 74% of the country's total population. By 2030, that figure will drop to 68%, and all the way down to 60% by 2050. America's working-age population is set to decline, too, but not nearly as much -- from 66% today 61% by 2050.

China's population is so large that this rapid decline in its working-age population adds up to literally hundreds of millions of people: 

Source: Bureau of Labor Statistics, author's calculations. 

This is virtually the same trend that pushed Japan's growth prospects off the rails for the last 20 years.

Predicting what any economy will do is a lost cause. No one can do it with any accuracy. But I'll try. I like to think that China's story will play out like this: Growth will slow, a little at first and then dramatically. Millions of investors will lose, and legions of economists will be humbled. The culprit will be demographics, and like Japan 20 years ago, we'll look back and wonder why it wasn't so obvious.

I'm a fan of investor Marty Whitman's motto that, "Rarely do more than three or four variables really count. Everything else is noise." Over the long term, the most important number China needs to worry about is its plunging population of working-age citizens. Everything else might be noise. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


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  • Report this Comment On June 25, 2013, at 10:23 AM, jpanspac wrote:

    I think you're on thin ice here. Saying China's recent problems are caused by an aging population is like saying the hot summer we're having is caused by global warming. The mechanisms and time scales are completely different, so there's very little evidence of cause and effect.

    Of course, my argument doesn't mean you're wrong, either.

  • Report this Comment On June 25, 2013, at 10:25 AM, XMFAimeeD wrote:

    Interesting. What do you make of the government's push to move 250 million to cities over the next dozen years or so? Seems like another important demographic shift with significant economic impacts.

    Aimee

  • Report this Comment On June 25, 2013, at 10:30 AM, TMFHousel wrote:

    <<Saying China's recent problems are caused by an aging population>>

    From the article:

    "Over the **long term**, the most important number China needs to worry about is its plunging population of working-age citizens. Everything else might be noise."

  • Report this Comment On June 25, 2013, at 2:28 PM, sagitarius84 wrote:

    Well, Japan had a massive bubble at the top in 1989, when real estate and stocks had absurd valuations.

    In contrast, at least some of the leading Chinese blue-chips are pretty attractive right now. (unless of course they are cooking the books)

  • Report this Comment On June 26, 2013, at 4:41 AM, kyleleeh wrote:

    <<Well, Japan had a massive bubble at the top in 1989, when real estate and stocks had absurd valuations.>>

    How much bigger of a bubble could you want when there are no young people to pay more for your home then you did?

  • Report this Comment On June 26, 2013, at 4:53 PM, SMFT wrote:

    <<Well, Japan had a massive bubble at the top in 1989, when real estate and stocks had absurd valuations.>>

    Try telling ANY professional, other then the uber-wealthy, living in BeiJing (or, ShangHai, ShenZhen, TianJin, ChengDu, ChongQing, etc, etc,) who wants to buy a house that there is no bubble there.

    I was in a new community about 90 minutes from Beijing last month. Empty homes, empty shops and empty office buildings. HUNDREDS of sales people selling the homes, and thousands of people coming on a Saturday afternoon to look at the little models of what is going to be built and throwing-down their cash.

    I pulled all my assets out of China as soon as I got back. I still manufacture there via 3rd party manufacturers, but no WAY I'm putting my money over there.

  • Report this Comment On June 26, 2013, at 6:01 PM, marcrm wrote:

    I spent a lot time in the Peoples Republic of China from 2000 through 2003 training engineers. I had a Sunday morning to rest, and I spent it in a park in Shanghai. I noticed all of these parents with their single child in the park.

    That evening I spoke of my observation to one of the Chinese distributors. He said - "Child is King! Every child has four grandparents where he/she is their only grandchild".

    The one child policy has lots and lots of implications besides a rapidly aging population.

    On top of that you add the staggering pollution . China has lots and lots of problems that will hamper growth.

  • Report this Comment On June 26, 2013, at 6:04 PM, Xrat wrote:

    By 2050..., 60%, 61% it appears that the U.S. and China will be in the same place. China will have bigger numbers but the ratios of workers to non workers will be little different. Workers around the world are going to have to come to terms wth working longer, or saving harder. The advantage that the U.S. has is that most of it's infrastructure is already in place.

  • Report this Comment On June 26, 2013, at 6:07 PM, Zinj wrote:

    I'm with Aimee - If and when China industrializes agriculture it will free up an ENORMOUS (multi-hundred million) working-age people who can more than compensate for the birth rate issues. The trick for The Party is to keep those people on the farm until they have a place and a job for them in the city -- which is why there is a complicated system of residency permits which are widely flouted in China's shadow economy of migrant and undocumented workers.

    Japan did not have the same reservoir of rural people to tap to fill the urban worker gap.

  • Report this Comment On June 26, 2013, at 6:30 PM, RichKenn wrote:

    Why isn't the same thing true here? We don't have enough workers to support Social Security and we don't have enough people in the spending demographic to pull us out of the recession. So, who is going down the tube first, the US or China?

  • Report this Comment On June 26, 2013, at 6:47 PM, Zinj wrote:

    Rich - the difference is that China will be the first (large) country that gets old *before* it gets rich. Europe, Japan, US, Canada, S. Korea, did it the other way.

    Our demographic problems are far easier than Europe, Japan or China because of immigration and because our decline in fertility hasn't been anywhere near as sharp. And also, we have immigration. Japan's policy on immigration is (almost) that there is no immigration.

  • Report this Comment On June 26, 2013, at 6:49 PM, KBOKSOFT wrote:

    Well, there are a few other problems over there. Like: they are trying to run a capitalist/communist, democracy/autocracy/plutocracy with a billion people ranging socially from medieval peasant farmers, to early-1900's Europe/America sweatshop workers, to mafia-style corrupt politicians, to high-tech entrepreneurs, to a so-called "middle class" who want to buy random stuff that makes them look like "upper class" Americans.

    China treats copyright and patent laws like we treat those "do not remove" warnings on pillow tags. At least Japan was leading the way in many respects. China cannot make a future out of ripping off the rest of the world's ideas. The latest important Chinese invention: gunpowder.

    ...and if anybody points out anything obviously wrong over there, they just disappear into the night. This is not exactly the formula for "progress".

    Instead of pondering what will eventually kill China, we might ask ourselves how this crazy experiment has survived to now. (Hint: Everyone's making money!)

  • Report this Comment On June 26, 2013, at 9:26 PM, captam wrote:

    You're overlooking immigration. For three decades during the 1970s-1990s ,amy Chinese have sought to go overseas for better prospects. The trend has reversed...many now want to go back because their economic chances in China have improved so much. Then you have non-Chinese manpower trying to work in China.... and they are already letting them in substantial numbers. China will not face a labour shortage for decades. The cheap mass assembling jobs which cannot be automated will get sub-contracted to poorer Asian countries

  • Report this Comment On June 26, 2013, at 11:19 PM, Junster wrote:

    The thing that this author and the other naysayers don't understand and often are frustrated is how they would be wrong about the so obvious is they don't know Chinese and their culture. Yes I agree there should be so-called critical "three or four variables" in economics forecasting, But I don't think it will be an easy task to have all different confident/arrogant economists in line with each other. I would say the political reform is the key to China's economy future, and all others are just factoids. Chinese is one of the most enduring (all perhaps the only standing-alone) cultures. Don't you think there must something there. So my advice is please quit worry about Chines economy, they will survive as long as you may imagine. Lastly, I would say my own prediction here, the last economy standing will belong to those Vikings. People in the US are too spoiled and just keep squandering. Can anyone imagine what will be if there are a same population as China?

  • Report this Comment On June 27, 2013, at 1:02 AM, observerbob2013 wrote:

    The main difference between the Japanese Economy and the Chinese Economy is, and always will be, size. Japan lacks resources, space and manpower.

    There is no doubt that the one child policy is unsustainable and will eventually be reviewed but in a country with a billion people it was essential to control that population growth but obviously solving one problem often causes other problems.

    The other major difference is that most of China's investment has been in infrastructure producing massive rail and road networks, nor to mention dams which produce both power and reduce the annual flooding. This type of stimulus will pay dividends for decades to come.

  • Report this Comment On June 27, 2013, at 10:53 AM, kyleleeh wrote:

    <<Why isn't the same thing true here? We don't have enough workers to support Social Security and we don't have enough people in the spending demographic to pull us out of the recession. So, who is going down the tube first, the US or China?>>

    Immigration is the main reason. Unlike China and Japan the US is a very open society that immigrants have found very easy to assimilate into without abandoning their own culture. China and Japan have never been major recipients of immigration. Also while English is the international business language, Japanese, Mandarin, and Cantonese are not spoken anywhere else but their countries of origin.

    To grow it's economy China can draw on the potential of 1.3 billion minds, but the US can draw on the potential of 6 billion minds.

  • Report this Comment On June 27, 2013, at 5:52 PM, greyhound44 wrote:

    I sure made a ton on Fuji Heavy Industries (7270:JP) recently, and just a few days ago got the most recent dividend after having sold my position.

  • Report this Comment On June 27, 2013, at 9:46 PM, TMFBlacknGold wrote:

    Growth will slow with a shrinking working-age population, but it seems as if China has a lot of room to improve its per capita. Do you think that would help offset some of the slowdown? Each worker will be become more valuable to the economy.

    Not like we're population scientists or anything...

    Maxxwell

  • Report this Comment On June 27, 2013, at 10:22 PM, Velek wrote:

    I like the Population Reference Bureau:

    http://www.prb.org/Journalists/Webcasts/2013/tfr-gni-engage-...

    Many regions of the world are sub replacement now.

  • Report this Comment On June 28, 2013, at 10:19 PM, dmawhinney wrote:

    There's a huge difference between Japan and China. Japan has no natural resources; imports all its energy sources and raw materials; and doesn't have enough space to sustain its population without food imports as well. China on the other hand...

    China is a huge consuming market still in the process of wakening. Foreign enterprise will set up shop in China to serve it. Japan on the other hand...

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