Friday, January 4, 2019

China - more problems than just a trade war

Not surprisingly China has a lot more problems than a Trade War with the U.S. and it is internal. Xi Jinping has recently stated that Taiwan should rejoin the mainland and that military means to achieve this are not unthinkable.  How is that for starters?  And why is this coming up now?  Maybe it distracts China’s population from its real problems such as demographics, falling internal consumer demand and more dependence on export, a rapidly increased debt load!

It is a serious problem. The UN forecasts that each retiree in China will be supported by just 2.1 workers by 2050, when the population of over-65s will rise to 370 million from about 138 million in 2014, which at 10% of the country’s population is already a record proportion of elderly people.

However, China is not the only country facing this problem of a greying population, even in Asia. Three Asian countries are projected to have fewer than two people of working age for every retiree by 2040: Japan, Korea and Singapore.

The difference, of course, is that these countries are already much richer than China and are better prepared to cope with the burden on their healthcare and pension systems. The effect of this demographic shift for a poor country could be devastating.
From Insurance Asia, October 2016

When we hear that China is pulling the world economy on a downward trajectory, we tend to think of its exports. For the past two decades, that’s all China was to the world: During the decade of globalization, from 1998 to 2008, the world economy ticked along to the value of the yuan, the trillions of dollars in China’s trade surplus and the shiploads of running shoes and touchscreens pouring out of Guangzhou and Shenzhen.
The past five years were supposed to change all that. China had found itself caught in a “middle-income trap” – too prosperous to remain a low-cost export manufacturer, but lacking the consumer-centred economy it needed to become a self-sustaining middle-class country. Mr. Xi exhorted the country to turn inward, to become a higher-wage consumer economy fuelled by domestic real-estate and stock markets. In 2015, Premier Li Keqiang announced his “Made in China 2025” policy, aimed at giving domestic production a 70-per-cent share of all goods within a decade.
From Doug Saunders, Globe and Mail Jan 2019

You may think that only Russia has demographic problems or that a declining population is typical for Europe?  Not so, Japan’s population is getting older rapidly as well and then there is China. It’s population is projected to decline within 10 years and it is not because of the re-education camps! Its because of its aging population.  New labor entrance is down since 2010 and projected to decline by 8 million per year around 2023.

Also, middle class labor is demanding lately higher wages. It is losing its competitive edge. Its long-term plan for 2025 is also off track. Remember China wanted to create its own internal consumer market to make it less dependant on exports. Well, the absence of a decent social network; rising medical costs (exceeding U.S.$ 2.3 trillion per year) has kept the savings rate of an anxious middle class way too high and China’s consumer spending is actually declining!  China’s plan for 2025 is not going very well.

If you look at the demographics and expect China to become the world’s largest economy, that may no longer be as straight forward as you may think. In fact, some think that India, a democracy, that lately is undergoing enormous reforms is more likely to become the world’s largest economy. China sounds lately a lot more belligerent. China’s arrests of Canadians in a tit-for-tat about the Huawei arrest in Canada (handled in a very uncreative way by the Trudeau government) is now rumoured to be as high as 13 people. That shows more how anxious China is about the current situation than anything else and it doesn't help goodwill for China in the rest of the world. China knows its practices of Intellectual Property theft and its espionage through companies such as Huawei is in the spotlight of the world right now. That doesn’t improve its exports either nor its drive to become a world leader in technology.

Finally, there is the debt load that has exploded in recent years. Corporate and government debt has been increasing since the mid 1990s.  Since 2008, however, it has accelerated to close to 300% of GDP. That compares with Japan and the U.S.! Today, China’s PMI index is approaching 50% - below 50% indicates economic contraction!  Will China finally go into a real recession? (PMI = Purchase Manager Index).

The stock markets these days are scary and the Chinese picture will add to the volatility. It is kind of crazy that we claim that the stock market is governed by human emotion when 90% of trading is institutional buying and just 10% is directly controlled by fundamentals and mom & pop investors. It makes you wonder whether all those trading algorithms are following technical patterns and exaggerating what 'normally' are considered human sentiment trends. Are the machines following even more emotional patterns than humans themselves? Is that why markets are so volatile when following headline news?  No wonder that these days the markets seem more emotional than ever with machines possibly outdoing humans!

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