Forget all the other worries about China. The big problem is that the country is going to run out of its most productive workers.
Ultimately, this means that growth will start grinding to a near crawl, at best.
“Most analysts believe China will rebound,” states a recent report from Frost Investment Advisors titled Cracks in China’s Economy. “That may well be true, but we think there are some cracks in the foundation.”
Of course, many investors already know about the country’s out of control real estate debt, as evidenced by the problems at Evergrande Group. And they may be aware that the communist country is clamping down on business in a big way with increase regulatory actions. That shouldn’t surprise many people because China is a centrally planned economy.
In any event, those two issues, which the Frost report also raises, could likely be fixed in relatively short order, if the government really wanted to do so. I don’t think the Chinese leaders do want to fix the regulatory excess, but they may have to fight the debt surge like it or not.
Where are China’s Babies?
However, the Frost report highlights a more gnarly problem: the forthcoming lack of highly productive workers. Put another way, there’s been a dearth of baby making in China for decades now and that means there’s a demographic bulge.
“China’s population is aging rapidly, with the most productive members of the labor force set to retire in less than 15 years,” the Frost report states.
It gets worse.
“The country’s birth rate has declined significantly over the last 20 years and shows signs of flattening in the decades ahead,” the note continues. An accompanying chart shows that the death rate in the country already vastly exceeds the birth rate.
This matters because a country’s economy can grow only when its population grows or when its per worker productivity rises. As the population shrinks, then the whole growth of the economy will reply on worker productivity.
And there’s the rub, because how will that productivity grow when big businesses are increasingly cautious about investing in China and when the country’s own government is stymying growth will a boom in unnecessary regulations? It likely won’t, which means sooner or later the second largest economy will start to contract.
“Many Chinese may well get old before they have the opportunity to build the assets they need to retire comfortably,’ the report states.