China and India: population, production, consumption

Why China’s Shrinking Population Is Cause for Alarm

China struggled for years to curtail its rapid population growth. Now that its population is declining, economists and others fear serious implications for China and countries around the world.
By Nicole Hong

Jan. 18, 2023Updated 4:31 a.m. ET

3 min read

New data released this week by the Chinese government revealed that China’s population has begun to shrink, a momentous shift that will have broad ripple effects both domestically and globally.

The government said on Tuesday that deaths last year in China had outnumbered births for the first time in decades.

This could spell the end of China’s position as the world’s most populous country, a transition that could profoundly reshape the global economy in the long run. India’s total population is expected to surpass China’s later this year, according to a recent estimate from the United Nations…[end quote]

China is a totalitarian country. Their draconian “one child policy” led to the current situation of a shrinking young population while they have a large and long-lived elderly population with a young retirement age (60), dependent on government pensions for support. Due to cultural reasons, the “one child policy” led to an imbalance of males over females. The relatively few young women are not responding to government incentives to increase family size. Educated Chinese women are increasingly delaying marriage and choosing not to have children, deterred by the high cost of housing and education.

How will India’s position as the most populous country affect the Macro economy?

India is a democracy. India has tremendous cultural diversity.

#415 million exited poverty in India in 15 years: UNDP
The Times of India, Oct. 18, 2022

As many as 415 million people exited multidimensional poverty in India in 15 years …

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[end quote]

Total poverty in India is 16.4% but this average disguise immense differences in the poverty rate. Kerala has < 1% poverty while Bihar has 35% poverty. India has the largest poor population of any country, about 230 million. But their success over 15 years in reducing poverty from 55% to 16% over 15 years is a striking achievement. Over that same 15 years, India’s population growth rate has slowed to under 1% per year.

In 2022, the median age of an Indian was 28.7 years,[16] compared to 38.4 for China and 48.6 for Japan; and, by 2030; India’s dependency ratio will be just over 0.4.[17] However, the number of children in India peaked more than a decade ago and is now falling. [end quote]

With its relatively young population, it will take a few decades for India to have the same problem as China (and Japan, the U.S. and Europe) of too many elderly being supported by too few young.

From an investment standpoint, what is the impact on U.S. companies from the changing economic and demographic situation in China and India?

Companies are already moving their production from China to lower-cost manufacturing countries with less political sensitivity, such as Vietnam and Mexico. Will this significantly increase manufacturing and supply chain costs or will the transition be relatively seamless? What will be the impact on consumer prices (inflation) in the U.S.?

Will India become a significant consumer of U.S. exports? The depth of poverty of India’s poor is truly intense. Clean water, sanitation, cooking fuel, electricity and housing are their concerns, not consumer goods and services. But India’s economy is growing well although the growth is forecast to slow in 2023 along with the rest of the world economy. If India’s past success in reducing poverty continues, India may become a significant export market in the future.

The headline news about China’s population shrinking will surely lead to at least a couple of decades of real hardship in China.

China’s growth story in the past 20 years has been extremely good for the U.S. Their low-cost exports and willingness to buy U.S. Treasury debt with their USD profits kept inflation and long-term interest rates low in the U.S. for that time.

Will this situation continue? Will India step in to replace China?

Wendy

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China aside from the decline in population has walked into a population, borrowing/debt and manufacturing inputs inflation trap. Meaning the demands of industrializing do not work for such a larger population without enough resources domestically to support the manufacturing base.

India is now an industrial power but not following China’s path of overextending her borrowing. India will dynamically grow for the longer run.

Apple is moving some production to India. And is looking at moving more there. A good start for India.

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Good summary Wendy,

One little thing.

India is very well educated compared to the USA. For example, Calculus is just math in India, it is taught in 11th grade (equivalent) and higher math is taught before college.

With 1,428,627,663 people and 8.8 percent of them being between 15 and 19 there are roughly 125,000,000 million in high school. This means about 25,000,000 will graduate each year for the next five years. If the west simply recruited the top
10 percent, they would get about 2,500,000 a year in new blood. It is likely that more than one western nation with a declining population will tap into this labor pool. This might, or might not, be a problem for India as a large portion of its top talent is sucked up and westernized.

A careful analysis of supply from India and demand from the west for top talent would be enlightening. It would be difficult also as a lot of labor needed in the west will be top craftsmen, not top engineers and scientist.

Cheers
Qazulight

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You make an excellent point, @qazulight. Traditionally, Indian artisans belong to castes with generations of craftsmen. At least some of their products are awesomely beautiful. I’m sure that these young people could easily be trained on modern tools and techniques used in the U.S. – if only there was an organized effort to bring them and good training schools. That would also help American youth. But I’m not aware of craft training schools other than the one described in “This Old House.” The U.S. will need millions of craft people and construction workers in the future but AFAIK they are still being trained on the job, not in schools.

http://www.handicrafts.nic.in/themecrafts/ThemeCrafts.aspx

Wendy

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Do you think China’s demographic changes are net inflationary or deflationary or maybe about neutral?

On the one hand, a shrinking population would tend to be deflationary unless the remaining individuals increase consumption more than the consumption lost due to declining population size (think of excess capital equipment that can be idled if total consumption declines).

On the other hand, if the age distribution is skewed older (as the population declines due to too low birth rate) then with older folks consuming more than they produce, an aging population might be inflationary.

@mostlylong you make some good points.

Hmmm…

Consumer price inflation results from demand for goods and services growing faster than supply of those goods and services. That’s in a free market economy. But China is a Communist country (or maybe more like a fascist command economy?) where the government can and does control prices.

China’s mandatory retirement age is 60 for men and 55 for women – or 50 for blue-collar female workers. Since China has a high average longevity, that leads to long retirements.

An average urban retiree can receive between 2,500 to 4,900 yuan per month. ($369 to $723). That’s not much and the rural pensions are lower. So many “retirees” are forced to work.

I don’t know anything about how China manages its money supply. China’s Government debt accounted for 20.8 % of its Nominal GDP in Sep 2022. (Compared with the U.S. with debt:GDP = 120%.)

As investors, I think a more relevant question will be: how will Chinese demographic and political changes impact the companies that we invest in?

Looked at from that perspective, I think that an aging Chinese population, many of whom are forced out of formal jobs and are eking out a meager existence on small pensions supplemented with informal work, will not be a strong export market for the U.S. The young population will be forced to support the older generation so their spending power will be reduced.

Wendy

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China has price controls. There are no accurate inflation stats out of China.

The inputs coming to China as imports must be subsidized to maintain these price controls. This sets up a very rude awakening later in this decade, think our 1970s after Nixon’s price controls. Keep in mind the RMB is pegged to the USD. That is going to make the rude awakening much worse. The USD was not pegged to another currency in the 1970s or any other time that I know of.

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I would say deflationary. China’s decreasing number of workers will be unable to pay enough taxes to support the promised social benefits. The seniors won’t be consuming more as their retirement benefits will likely be cut perhaps even eliminated.
China population pyramid 2022:https://www.populationpyramid.net/china/2022/
China pyramid is a top heavy column.
China population pyramid 2030:https://www.populationpyramid.net/china/2030/
The column is even more top heavy.
And likely the real actual pyramids are worse as China has lied about population data.
Yesterday Zeihan about the collapse of China.
Demographics Part 5: The Chinese Collapse - Zeihan on Geopolitics

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Beyond the borders of China what will be the impact upon the world economy as China’s dissolve as hundreds of millions of Chinese are no longer middle class consumers?
That is what happened when Lebanon’s economy shattered.

Perhaps there is a lesson for the USA in the Lebanon experience. Even as turmoil in the Lebanon economy is occurring…
"The taxation system in Lebanon is highly regressive, which means that there is no wealth tax code, and corporate taxes are amongst the lowest in the world compared to all OECD averages," Hussein Cheaito told DW.

The beneficiaries of the taxation system are those of the "political class and their business connections, because this 1% owns more than 70% of the national income

Lebanon’s government continues to represent businesses and those of wealth.
Well tj the situation isn’t like that in the US! But what has been the trend within the past 50 years. Rome did not collapse overnight and neither will the US.

We know what happens from Japan. Which is interesting because the deflation takes the pressure off the peg and the input inflation. But it puts pressure on the deficits. Deficit spending is a good thing in larger numbers as relevant to the economy. Over doing it or under doing it is problematic. I do not have China’s government deficit numbers. Japan’s are enormous using debt to keep people employed.

Japan’s population has also had a massive reduction in the numbers.

300% of GDP according to 2019 & 2021 stories.

Japan? 260%

If you have a chart of Japan’s percentage you might find it is finally falling. Might!

China is a basket case we have never seen before. It is likely to go all the way back economically to 1985.

If I consider these 3 elements needed for production of anything:

commodity inputs
capital equipment
labor

My default expectations, given a decline in population size, might be:

commodity inputs: less total demand for these from a smaller population size thus deflationary pressure on commodity prices

capital equipment: there is an available capacity to support a larger population, but going forward a smaller population requires less capacity thus deflationary pressure on capital equipment and associated investment (this means excess capital, implying lower yield on equity and debt investments very broadly speaking)

labor: there is a smaller population thus a smaller total demand but also smaller supply of labor thus maybe about net zero inflationary pressure on labor costs

I’m very open to other viewpoints, of course, and both demand and supply need to be considered in the pricing of anything and the above are broad strokes. Government monetary and fiscal policy matter plus different cultures have different mindsets on saving (e.g., Japanese are big savers). And then all of this within a possible global market for any given product/service.

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