News in Charts: Can China get rich before it gets old?

China’s population ageing is occurring at much lower income levels than is typical in much of the rest of the world and also with very high levels of debt. This begs the question: can China get rich before it gets old?

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The 2020 census and China’s sharply falling birth rate have heightened the government’s concerns about the nation’s worsening demographics. Births fell from around 18 million in 2016 to just 12 million in 2020 — the lowest since 1961 when the population was less than half its current size. Moreover, the country’s baby boomers will increasingly begin to retire over coming years and the old-age dependency ratio will soar. According to the UN, this ratio will more than double over the next twenty years to almost 40%. Unfortunately, belated attempts by the government to address China’s demographic problems do not appear to be making much of a difference. Indeed, the experience of other east-Asian countries suggests it may be difficult to reverse these trends.

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After being a star performer on the global stage in 2020, China’s economy has slowed materially in 2021, with GDP growth down from over 18% on a year-on-year basis in Q1 to under 5% in Q3. On a quarter-on-quarter basis, growth was just 0.2% in Q3 — even many advanced economy governments would be disappointed with that. Another weak quarter seems likely in Q4. Nevertheless, highly favourable carry-over effects from strong growth in the second half of 2020 will ensure the government easily surpasses its ‘above 6%’ growth target for the year.

Looking further out, given this poor demographic outlook, its productivity performance will be key for China’s longer-term prospects. However, we are not particularly optimistic on this front. We doubt the willingness of the authorities to make the difficult, but necessary reforms to China’s debt-driven growth model, and indeed the authorities have recently moved backwards in some important policy areas.

Events in the all-important property sector have gained significant attention recently and have been one of the factors weighing on the economy this year. Property-related sectors directly account for around 15% of GDP and a far larger share when indirect impacts are taken into account. The sector has also been an important contributor to the sharp rise in debt levels in the economy. We remain sceptical, however, that the government has given up on its addiction to using property (and infrastructure spending) as a tool to boost the economy when other sectors are struggling. Hence, the economy is likely to remain plagued by inefficient investment and high debt levels.

One bright spot for China’s economy recently has been the ongoing strength of export growth amid strong demand for goods in the advanced economies. This could increasingly be at risk, however, if Western consumers begin to switch some of their spending back to services. Further out, given the huge size of China’s economy and increasingly testy global trade relations, it seems highly unlikely that the external sector will provide the same impetus to growth as in some previous decades. Geopolitical rivalry with the US also means it will be increasingly difficult to source key technologies from abroad.

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Meanwhile, the government has been aggressively intervening across a number of economic sectors recently under President Xi’s mantra of achieving “common prosperity”. Over time, this is likely to have a negative impact on foreign investment and domestic innovation. Historically, it is typically democracies and resource exporters that achieve significant catch-up with the US, not authoritarian regimes. Unfortunately, President Xi’s China is increasingly moving in the wrong direction.

All in all, with the important 20^th National Party Congress late next year, the Chinese authorities are likely to stimulate growth to help ensure President Xi’s coronation for a third term. But, in Fathom’s opinion, the country’s economic ascent is increasingly under threat. Amid a rapidly ageing population, high debt levels, a challenging external environment, and an increasingly interventionist government, we suspect that China may struggle to get rich before it gets old, and is at risk of ‘Japanification’ over the coming decade.

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