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📝 Focus

• China: Old Before Rich?

📊 In the Markets

• TRY harder (₺)

• China Deflation

📖 MoneyFitt Explains

🎓️ Deflation worse than Inflation?

📝 Focus

China: Getting Old Before It Gets Rich?

In an FT article 3 weeks ago, Rockefeller chair Ruchir Sharma said Wall Street's bullish forecasts for China's reopening boom were unsupported by reality, with feeble corporate revenue growth in the first quarter of 1.5% and an 8% fall in April imports. May imports continued to fall, and last Friday, China reported consumer prices DOWN on the previous month for the 4th straight month with producer prices, which typically lead consumer prices, down by much more (see below.) He concludes that a "growth model dependent on stimulus and debt [i.e. China's since 2008] was always going to be unsustainable, and now it has run out of steam." As the Japanese stock market hits another 33-year high, many ask if China's DEFLATION🎓 will lead it into the deflationary lost decades Japan suffered after its 1980s boom-times... when what was then the world's second-largest economy was tipped to topple the US?

..... ▷ In the near term, the recent economic slowdown could well be due to a premature withdrawal of stimulus by Beijing after what looked like better-than-expected first-quarter growth, led by strong exports as supply chains reopened and backlogged orders shipped. If that was the case, fresh stimulus, given the lack of inflation and high youth unemployment, could help restart momentum in domestic growth, leading to a virtuous growth cycle of consumption, hiring and investment. Banks have already started lowering deposit rates, and incentives for EVs are being extended, both strong signals of intent.

..... ▷ Longer-term comparisons with Japan do look a bit more ominous, though. The Japanese economy had decades of economic stagnation after the bursting in the late 1980s of the asset price bubbles in stocks and property, which contributed to a massive banking crisis, which then led to years of feeble lending and persistent deflation. Between 1991 and 2000, the average annual GDP growth rate was only about 1%, as deflation eroded consumer confidence and discouraged spending. Unemployment more than doubled, and government debt ballooned as it tried (and failed) to spend the economy back to health. The benchmark TOPIX fell from its peak of 2,900 in 1989 to under 700 in 2012, 23 years later... and at Friday's 2,224, there's STILL almost a third to go before it regains that all-time high.

..... ▷ Another shared characteristic is a shrinking population. As Sharma also said, economic potential is a function of population (workforce) and productivity growth. Japan's population has been declining since 2010, with a low birth rate, an ageing population and limited immigration. Last year, China's population fell for the first time in 60 years ​​after a multi-year decline in its birth rate that experts now say is irreversible. It was a combination of the rocketing cost of living and childcare, massive gender imbalances, and changing societal norms after 36 years of the one-child policy brought in under Deng Xiaoping (and only replaced, many years after alarm bells sounded, with a two-child policy in 2016, and then a free-for-all in 2021.) China's total fertility rate (TFR) at 1.7 per woman remains well below the replacement rate of 2.1, which points to a declining population. Japan's is even lower at 1.3, while South Korea's at 0.9 is the lowest in the world. But unlike its rapidly ageing rivals, China potentially faces the prospect of becoming old before it gets rich.

The impact of a high elderly dependency ratio (the ratio of the population above a certain age to the working-age population) is the danger that economic output and tax revenue from relatively fewer workers may not support the needs of the elderly, leading to strain on social security systems, healthcare, and overall societal well-being.

(Incidentally, the most populous country in the world as of this year, India, is, at 2.2, surprisingly only a little above the replacement rate of 2.1. The global TFR is currently at 2.4, heavily driven by African nations.)