Forget China – How population changes will prevent China from becoming the next great superpower

Posted by – July 15, 2013

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According to census estimates, China’s population is 19% of total world population, nearly 5 times that of the U.S. As such, it should come as no surprise with that level of scale China’s economy has exploded with modernization and increasingly capitalist policies.

But it oftentimes goes unnoticed that per capita, China is closer to Bosnia or Turkmenistan than it is to the U.S., Japan, or other developed economies. 

So if China’s status as a supposed world power is based primarily from the size of its population, what would happen if that population were 10, 25, or 50% lower? What happens to economic growth, investment return, and political stability if the engine of growth doesn’t just sputter, but bricks completely? With that in mind we ask the question today, is now the time to forget China and look elsewhere for market beating growth? – The Flaneur

Forget China – How population changes will prevent China from becoming the next great superpower

Over the past 20 years, the international community has rightfully turned its attention—politically and economically—to China. Since Nixon’s Ping Pong Diplomacy opened China to the world, the gargantuan nation has catapulted to the top ranks of the global economy.

And that growth has truly been staggering.china population

Source: http://esa.un.org/unpd/wpp/Excel-Data/population.htm

And for all that China’s central government has gotten right managing this economic boom, it has made one critical error that will prevent China’s ascent to world leadership. The one-child policy.

China’s population will soon begin a rapid decline in terms of both raw population and relative to the rest of the world. We posit that the mass of China’s populous has been a defining element of the country’s ascension to the world stage. With that population set now to decline, it is time to look elsewhere for the next generation of outsized, emerging market growth.

The Policy of Population Control

China first began policies for population control in the 1970s, culminating with the One Child policy in 1980. At the time, the population was growing rapidly, and the government was concerned it would not be able to provide basic provisions for the massive, poor, and rural population at the time. And thus was born the One Child policy.

The policy turned out to be quite effective; today, China’s massive population is on the verge of near collapse.

Consequences: Intended and … Unintended

According to government figures, the overall Chinese population grew just 0.57% annually from 2001 to 2010, just 1/5th the level seen in the 1970s. Generally, for a population to maintain stable, women on average must have 2.1 children. In China, this number stands at 1.4 and has been below the replacement level for nearly 20 years. For comparison, the U.S., U.K., and France each have fertility rates around 2.0.

Another, and equally unsettling dynamic, is the steep decline in young labor while the population overall ages dramatically.

china’s changing population demographics

The result, fewer laborers to support the welfare burden of the soon to be elderly population. According to the Brookings Institute, China’s large and youthful population structure attributed 15-25% of per capita GDP growth from 1980-2010. That benefit is now exhausted.

The Chinese model of economic growth, extremely cheap labor in the form of minimally educated technical workers (think assembly lines and farm hands), will no longer work as the abundance of youthful labor disappears. The solution, then, is education.

What must happen for continued Chinese out performance? And how likely are such reforms?

To manage the transition from young to old, the Chinese must reform the education system massively. Today, Chinese education is second to none in creating dutiful technicians. It is pitiful however, at creating imaginative, innovative, thought leaders. According to McKinsey & Company’s report “China’s Next Chapter”, education stands at the top of the list of societal challenges facing the nation. It is the difference between a republican (as in dutifully elected representative government of the people, not of the political party) and socialized system.

The question to ask ourselves then, is whether the communist leadership in Beijing is willing to bring creativity, freedom of thought, innovation, and individualism into the education system. The risk is political revolution in a generation or less, a risk we don’t see the central government willing to take.

getting old not richSource: http://www.brookings.edu/~/media/research/files/articles/2012/6/china%20demographics%20wang/demographics%20china%20wang

With a population set to plummet and a lopsided youth demographic all but incapable of supporting elderly welfare, the all-but-forgone conclusion of 21st century Chinese supremacy no longer seems as sure.

So, if China is not the answer for the next 30 years, where then to focus emerging market portfolio allocations? The answer, sitting in the shadow of Chinese headlines, is India.

India

Total Population: The Twenty Most Populous Countries in 1950, 2010, 2050 and 2100 (million)

 top 20 pop 1950 top 20 pop 2010 top 20 pop 2050 top 20 pop 2100Source: http://www.china-profile.com/data/fig_WPP2010_TotPop_Top20.htm

From a demographic standpoint, India is set to boom. Within the next decade, India will become the most populous country in the world. The country’s fertility rate is solidly in growth territory at 2.6 children per woman. The U.N. forecasts that 68% of India’s population will be of working age in 2030 with just 8-9% aged 65 or older. And critical to developing a modern economy, the forecasts predict the ratio of urban dwellers increasing from 30% today to 40% in 2030.

While this level of growth and change absolutely presents challenges–in social welfare, the war on poverty, and infrastructure to support–it also provides the country with the human resources to emerge from the Chinese shadow. Just like China from 1980-2010, India will now reap the benefits of a growing and youthful population. We expect to see a similar boost to per capita GDP as experienced by China over the past 20 years (in the neighborhood of 15-25%).

indias moment

Source: http://www.economist.com/news/briefing/21577373-india-will-soon-have-fifth-worlds-working-age-population-it-urgently-needs-provide

Beyond pure demographics, India is the world’s largest democracy. It is the largest English speaking country in the world (so much for a future world of Mandarin speakers…). India is home to a burgeoning high tech industry—perhaps no other country has benefited from the information age as much as India. What started as outsourced call centers has become a robust industry of technology, computer science, pharma, and not coincidentally, higher education.

This thesis is, by nature of population change, generational. China will certainly remain the preeminent emerging economy on the news, in the papers, and in investment analysis. But to buy low you must anticipate beyond today, and sometimes even tomorrow. Looking 20 or even 30 years into the future, we see India becoming the emerging market story of the 21st century. We are still looking East, just not quite as far.

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