China's People Problem
"The national budget must be balanced. The public debt must be reduced." - Cicero, 55 BC
People Problem Looming behind all the theatrics over Taiwan is a quiet, but potentially more threatening issue: China has a shrinking population. Should we even care? Is China’s problem our problem too? Consider the following two pictures of the world’s second largest economy. First, here is China’s working age population . . .
Source: Oxford Economics (historic data and forecasts), FactSet
After years of rapid growth, China’s working age population has been declining since 2015. Demographers expect it to decline significantly in the coming decades. Oxford Economics projects it to drop over 20% by 2050. Meanwhile China’s debt levels are rising sharply . . .
Source: Bank for International Settlements (BIS), FactSet
For answers, we turned to one of the top authorities on China’s financial system, Carl Walter, the noted author of Red Capitalism. Carl’s new book, Red Dream, will shortly hit the shelves. It highlights the risk that China’s extreme leverage, combined with its shrinking population, poses for its banking system – and for its economic and political stability. The following video includes the highlights of what we learned from Carl.
Carl is not your typical CNN “talking head”. He’s legit. Carl is one of the pioneers of China’s modern banks, having worked for more than three decades in China in senior roles, including as the CEO of JP Morgan’s China banking subsidiary. Carl led some of the first and most significant IPO’s of China’s state enterprises and served as a director for one of its largest banks. China’s major banks matter. It’s top four state-owned banks are global systemically important banks. They rank among the seven largest companies by assets globally – all larger than JP Morgan.
Today there’s a lot of leverage built up in China’s financial system. Its bank balance sheets have ballooned to 3-times its GDP. Its ratio of government debt/ GDP is much higher than the US’s and is trending towards Japan’s level. Today there are 65 million incomplete and empty apartments, which were built with the savings of the Chinese people. Real estate prices are beginning to decline, leading some people to start tearing up mortgages for their apartments still under construction.
Of course, China’s central bank can print money. But it cannot print people. If China’s population continues to decline, Carl worries that China’s bank deposits could begin to decline. In his new book, Carl explores whether Beijing has the financial wherewithal to fund the social contract the Party has with the people. The answer comes down to deposit growth, which has funded China’s historic growth and will be necessary to fund its future growth.
Is Demographics Destiny?
Does China have the financial wherewithal to continue its state-driven growth? Or is a day of reckoning near? Carl addresses that question in our video interview.
Demographics does not have to be destiny. Carl believes that Beijing does have options. He fears, however, that current leadership will not pursue those options. Instead, he sees the Party continuing its turn toward greater centralization, rejecting the economic liberalization that (Carl and we believe) lifted a billion people out of poverty and restored China to its historic position as one of the world’s leading economies.
Yours in the Field,
Frank Byrd, CFA Steve Korn, CFA
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