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Mark's Market Blog

4-4-10: Chinese Demographics

By Mark Lawrence

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As said by a member of my extended family, "Happy Jewish Zombie Day!"

The markets continue to trend upwards with little conviction. Alan Greenspan said this week that the US economy is regaining its mojo. I sortof agree with this. Unemployment will not budge this year, but the people who are unemployed don't make much money when they are employed, so that doesn't matter so much. Business is adapting to the new environment. Fears of a "double dip" recession are unrealistic, double dips don't happen in real life. I stand by my prediction on January 1st: the economy is healing, and absent an external shock, we'll do ok. There will be an external shock. Meanwhile, I expect the stock market to keep trending upwards, perhaps with a correction or two. Such corrections are looking rather overdue right at the instant.

S&P 500 October 5 2009 to April 9 2010

Above and in previous blogs I've alluded to the fact that unemployment in this recession is falling on the lower classes, who don't have a lot of money to spend anyway. While this certainly has social ramifications, in terms of business the unemployed are marginal customers. Here's some numbers current as of 4th quarter 2009:

Unemployment by Income

$12,499 or less 20.6
$12,500 to 20,000 17.2
$20,000 to 29,999 12.7
$30,000 to 39,999 8.3
$40,000 to 49,999 6.1
$50,000 to 59,999 5.4
$60,000 to 75,000 4.4
$75,000 to $99,999 3.6
$100,000 to 149,9992.5
$150,000 or more 1.6

Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.

With 1.34 billion people, China is the world's most populous country. As the world's population is approximately 6.7 billion, China represents a full 20% of the world's population so one in every five people on the planet is a resident of China. By 2018 or so, China's population is expected to reach 1.4 billion. Around 2030, China's population is anticipated to peak just under 1.5 billion and then slowly start dropping.

As recently as 1950, China's population was a mere 563 million. The population grew dramatically through the following decades to one billion in the early 1980s. China's population growth has been somewhat slowed by the one child policy, in effect since 1979. However, at the same time improved medical care and nutrition have nearly doubled life expectancy over the same period, with women's life expectancy increasing from 42 years in 1950 to 73 today, and men increasing from 39 to 70. China's total fertility rate is 1.7, which means that, on average, each woman gives birth to 1.7 children throughout her life. The replacement rate is 2.1; however, China's population is expected to grow over the next few decades due to their large number of young people, immigration, a decrease in infant mortality and a decrease in death rate as national health improves.

Currently about 48% of Chinese live in cities, compared to 80% of Americans or Europeans. The per capita GDP in the US is about $46k; in Europe it's about $35k; in China it's about $6500. If we assume the US averages 3% growth for the next few decades and China averages 8% growth, then at 5% difference it will take China about 35 years to catch up with Europe and nearly 45 years to catch up with the US. I consider this a generous set of assumptions for China: as they approach US productivity, they will find that capital becomes very scarce and existing knowledge of what to make and how to make it becomes insufficient. In any case, at this time China is 1.3 billion people who produce about a third as much as 330 million Americans, and about the same amount as 130 million Japanese - in other words, the average Japanese, US, or European worker is roughly 10 times as productive as the average Chinese.

Although the average Chinese is relatively poor by US standards, there is a huge emerging Chinese middle class, and attendant problems. Chinese now have the largest car market place in the world, and they have serious problems with traffic and pollution. There have also been a lot of very well publicized failures of Chinese quality control on foods and toys, and less well publicized failures in finance and product safety.

The Chinese diet is changing rapidly to include a lot more meat and calories, with the result that Chinese are putting on weight. Interestingly, while Blacks or Whites can get to a BMI of 30-35 before having serious weight related health issues like diabetes or heart disease, Asians cannot carry such weight. Studies by WHO indicate that serious health issues start in Asians at a BMI below 25. The result of this is that in the US, with our regrettable junk food culture, about 8.5% of adults have type 2 (age and weight related) diabetes. In China where less than half the population has access to the kinds and degrees of junk food available anywhere in the US, type 2 diabetes already affects 9.7% of the population, and another 16% are close to developing it. As the average Chinese diet continues to trend towards the western diet of more meat and fats, less rice and vegetables, China is looking at a health care catastrophe. It's not hard to project that in 20 to 30 years they could wind up with nearly half their adult population having diabetes and related health problems.

In 1979 China enacted their one child per couple family. While there are lots of exceptions to this rule, in fact it has been quite successful and has entered the Chinese culture. The average Chinese woman in the 1950s had between 6 and 7 children; today the average is comfortably below 2. In the chart below we see that in 1973 59% of births were third or more children. Today third births are less than 6% of all births.

However, that's not the whole story. In Chinese culture male children are much more valued than female children, with the result that enormous numbers of female fetuses are aborted. In China a male child grows up, marries, and takes care of his parents. A female child grows up and marries into another family. So in China it is said that raising a girl is like fertilizing your neighbor's farm. Also in China there's a huge trend called 4-2-1. Four adults pair off and marry, having one child per couple. The two children in the next generation marry, and have 1 child. That 1 child is expected to care for 4 grandparents and 2 parents in their old age. And that's if it's a boy, if it's a girl everyone is out of luck. In second and third births the ratio of males to females goes up substantially. Couples who have a daughter and then try for a second child are much more demanding that the second or third child is the desired male.

Another problem China is looking forward to is a large cohort of 20-something males without any available females to marry. In 2020, in the US there will be roughly 40 million men in their 20s; in 2020 in China there will be roughly 40 million excess men in their 20s. Up to this time excess Chinese men could marry by selecting a women several years younger; however in the coming generation, as the chart below shows, there simply are not enough younger women. We may expect a lot of trouble from this: China, which does not look kindly on gays, is going to have a huge gay population. Neighboring countries are going to be very upset when Chinese men come poaching their women. The Chinese government is going to have to make some decision about how many women they are willing to import, given their dedication to reducing their population. And finally, as Brigham Young once said, Any young man who is unmarried at the age of twenty one is a menace to the community. It's not hard to project that such a huge cohort of unmarried men will increase the Chinese crime rates, and perhaps get to a point where they threaten the stability of the government. If this happens, a tried and true way for China to reduce excess men in their population is to get into a war.

Chinese Classroom - count the girls.

Further down the road, China's low birth rate and increasing life expectancy are setting them up for a huge aging population with no one to care for them. Unlike the US and Europe, China currently has no social network (social security, medicare) to care for these people. But this problem only starts to get noticeable by about 2050, then get worse from there. By then Japan, the US, and Europe will have demonstrated several ways, likely both relatively successful and unsuccessful, to deal with this problem.

In conclusion, we all witnessed the "Japanese Miracle." From about 1960 to about 1990, Japan enjoyed huge growth rates until they built their economy up from a post-war train wreck to a point where briefly their per-capita GDP exceeded the US. Since that time, foreign investment capital has moved on to better investment possibilities in other countries, and their aging population, poorly designed financial systems, and lack of a world-class university system has caused them to have more or less zero growth for the last two decades. China is very actively trying to build a university system, but where will they get professors to teach literally hundreds of millions of students? Capital is already starting to flow away from China to better investment possibilities in other countries; China is by no means the only or even hottest investment spot. China has a financial system which is serving the Chinese government very well these days, but in the near future will prove to be far too centrally controlled for a true modern capitalist state. And finally, China will experience population pressures of a type and degree never felt before in the world. While it's safe to bet that China is likely to continue to do well in the short term, the idea that China will continue to have 8% growth per year for the next 4-6 decades seems to me to be incredibly implausible.

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