Energy Shots (Mobius Risk Group): Why China’s long-term economic outlook is complicated by an aging population and shrinking labor force.
Summary:
Long-Term Growth Handicapped by Aging Population: China’s hopes to become a high-income developed country must reconcile an aging population and a shrinking working class. The country’s infamous “one-child” policy from 1980-2015 created a demographic crisis that risks sapping government pension pools and handicapping economic growth.
Takeaways:
- China’s demographic crisis presents notable supply & demand risks to commodity markets. China is the top importer of major commodities like crude/petroleum, LNG, coal, corn, soybeans, raw cotton, iron ore, and copper ore.
- The country’s top-heavy age distribution will strain economic growth. The smallest generation of prime consumers since the 1950’s will decrease demand for transportation fuels, construction materials, and agricultural products.
- China’s demographic crisis is unfolding earlier than other major counterparts like Japan, where population stagnation occurred with GDP per capita already in the “high income” range. China’s GDP per capita, meanwhile, remains in the “middle income” range.
- Higher exposure to foreign demand will leave China’s economic outlook tied to consumer activity in the West and, eventually, emerging markets. The country’s investments in high-value manufacturing welcome demand-side risks for technologies like renewable energies and EVs.
- The state-run Chinese Academy of Sciences forecasts that the country’s pension system will run out of funds by 2035. Public pension expenditure as a share of GDP is already approximately 5.2%, up from 3.1% a decade ago. Roughly a third of provincial-level governments are running pension deficits.
- In 2002, ten working-age Chinese supported each retiree. By 2050, the ratio is predicted to fall to less than two working-age Chinese per retiree.
Risks From China’s Demographic Crisis:
In 2022, China was the #2 global economy in terms of GDP, the #1 global exporter ($3.73T), and the #2 global importer ($2.16T).
China’s trade prowess extends throughout commodity markets, with the country taking the top slot for global imports of crude, LNG, coal, soybeans, corn, raw cotton, iron ore, and copper ore, to name a few.
In the next decade, however, Chinese import demand will run headlong into a bearish risk factor lurking in China’s aging population.
China’s “Tombstone” Demographic Structure:
The CCP’s infamous “one child” policy from 1980-2015 is becoming the government’s worst nightmare.
The ideal demographic structure for a growing economy like China’s would be an expansive pyramid with a wide base and a skinny top.
Instead, China’s demographic distribution resembles a constrictive pyramid or the apropos “tombstone” structure — heavy on the top, narrower on the bottom, and skewed towards male genders.
A top-heavy population drives two concomitant risk factors:
- Fewer working Chinese to pay into China’s oversubscribed pension system.
- Less consumption (less demand) from a shrinking pool of working Chinese.
A Shrinking Ratio of Workers to Retirees
China’s retired population expanded to 296.97 million in 2023 from 280 million in 2022, representing 21.1% of the country’s total population.
If China maintains its existing retirement policy of 60 for men, 55 for white-collar women, and 50 for women working in factories, approximately 300 million workers will retire in the next ten years when pension budgets are already strained.
According to the state-run Chinese Academy of Sciences, the country’s pension system is expected to run out of money by 2035. More than a third of Chinese provincially-governed pension pools are already running at a deficit, and China’s public pension expenditure has exceeded 5% of GDP for the past five years.
Meanwhile, China’s working-age population has plateaued in the mid-800 million range for over a decade.
And laborers over 40 now comprise more than 50% of the working-age population.
As a result, the ratio of working-age Chinese required to support each retiree in the country has declined from 10:1 in 2002 to 5:1 in 2021. The decline is forecasted to reach 2.4:1 by 2035 and 1.6:1 by 2050.
Aging Consumers & Exposure to Foreign Demand:
As the share of China’s working-age population declines, so does demand for housing, cars, and child-related spending.
When the current “prime consumer” population of roughly 230 million Chinese between the ages of 30-49 reaches their 50s, they will be followed by the smallest Chinese consumer generation since the country’s famines in the 1950s.
Notably, China is entering its phase of low population growth before reaching high-income developed status. The country’s GDP per capita is still in the “middle income” range, far behind counterparts like Japan, which reached high-income status before its population stagnated.
A shrinking domestic consumer market will increase China’s reliance on exports. Hence, the CCP is racing to invest in high-value manufacturing for goods like EVs, renewable energies, and semiconductors.
Pushing the country’s manufacturing up the value chain welcomes two additional risks to China’s economic outlook:
- If demand for Chinese products falls short of expectations, as seen by the current headwinds for EV adoption.
- If required advancements in manufacturing automation (i.e., robotics) fail to materialize before the largest group of China’s labor force retires.
Takeaways for Commodity Markets:
- China’s demographic crisis presents notable supply & demand risks to commodity markets. China is the top importer of major commodities like crude/petroleum, LNG, coal, corn, soybeans, raw cotton, iron ore, and copper ore.
- The country’s top-heavy age distribution will strain economic growth. The smallest generation of prime consumers since the 1950’s will decrease demand for transportation fuels, construction materials, and agricultural products.
- China’s demographic crisis is unfolding earlier than other major counterparts like Japan, where population stagnation occurred with GDP per capita already in the “high income” range. China’s GDP per capita, meanwhile, remains in the “middle income” range.
- Higher exposure to foreign demand will leave China’s economic outlook tied to consumer activity in the West and, eventually, emerging markets. The country’s investments in high-value manufacturing welcome demand-side risks for technologies like renewable energies and EVs.
- The state-run Chinese Academy of Sciences forecasts that the country’s pension system will run out of funds by 2035. Public pension expenditure as a share of GDP is already approximately 5.2%, up from 3.1% a decade ago. Roughly a third of provincial-level governments are running pension deficits.
- In 2002, ten working-age Chinese supported each retiree. By 2050, the ratio is predicted to fall to less than two working-age Chinese per retiree.
