Monday, March 12, 2018

China's Booming Middle Class Set To Bust?

In 2010, the Brookings Institute offered a "watershed" report stating that the global "middle class" was set to explode, almost entirely from the Chinese and Indian poor populations urbanizing and transitioning to the middle class (middle class meaning annual incomes, per household of four, from $14,600 to $146,000 in PPP (purchasing power parity)).

In 2017, the Institute updated the original work (HERE) reiterating that from 2015 to 2030, China, India, and the remainder of Asia-Pacific will add 2.1 billion (or 89%) of the nearly 2.4 billion new entrants to the existing 3.2 billion person global middle class.  By 2030, presumably China will add around 800 million to the middle class and India more than 900 million?!?

Of the next billion, from 2015 to 2022, Brookings' estimates the middle class will grow as follows; India plus 380 million (38%), China plus 350 million (35%), Europe will add just 9 million (less than 1%), N. America 19 million (about 2%), Central & S. America about 50 million (5%), MENA (Middle East/N. Africa) 90 million (9%), and sub-Saharan Africa plus 100 million (10%).

I have so many problems with the Brooking Institute's estimates, but specifically, I'll take aim below regarding China.  The Brookings Institute estimate suggests China's middle class of 2030 will be larger than China's total working age population of 2030?!?  Chinese retirees on fairly frugal state pensions will not be joining the middle class.  It must be the working age population but problem is, math seems to suggest the Institute is significantly to totally wrong regarding future estimates for China's middle class...which is likely to reduce or undo the estimated growth throughout the globe.

Births in China:
Let's begin with Chinese births since 1950.  Chart below shows total births per five year periods (columns) and annualized averages are called out in comment boxes.  Peak births took place in the 1965-70 period at just over 30 million annually.  But even prior to the introduction of the one-child policy in '79 (with the goal of reducing China's total population to 700 million by 2080), the UN data makes it plain that Chinese births had already begun declining in spite of a continually larger childbearing population.  Even now with the one-child rollback, births are only set to decline further as the UN high, medium, and low variants all point down (detailed HERE).
China Childbearing Population:
Of course, after decades of declining births, the annual growth (red columns in chart below) of the child bearing population (15 to 45 years old) began decelerating.  And after 20 years of deceleration, the child bearing population (blue line) began declining as of 2007.  Slowly at first but by 2018, the childbearing population had fallen by 88 million with only further declines to come.
China Working Age Population:
So it should be no surprise that the annual growth (red columns in chart below) of the working age population would begin decelerating as of 1988.  Then in 2013, the working age population (blue line, those aged 18 to 60 years old) began shrinking.  In a nation with mandatory retirement at age 60 for men and 55 for women, this matters.  So far, the working age population of 823 million has "only" declined by 9 million.  However, in a nation with net emigration, we know the maximum possible workforce is 823 million and shrinking...and somehow its middle class is supposed to grow by 835 million???  By 2035, there will be about 120 million fewer potential workers or a population of about 733 million...a 15% decline in potential workers, consumers, tax payers, home buyers.
However, as the chart below highlights, now the pace of working age population decline really begins picking up.  Each column represent the annual decline in potential workers (chart below).
And to offer some perspective on the size of the working age population declines, the chart below.  In 2014, the decline was a paltry 150k or about the size of Syracuse, NY.  In 2015, China's potential workforce fell by almost an additional million, or about the size of Delaware.  And then it was Nebraska, and then Nevada, and in 2018 the additional decline will be equivalent to the lose of Oklahoma.  In 2019, China will lose the equivalent of Louisiana, then Virginia, North Carolina, and by 2025 China will be losing the equivalent of New Jersey.  It doesn't get better...from 2026 through 2028, China will lose the equivalent of Texas.  And over the next seven years, China will lose California.

China Working Age vs. Employees
In a best available "guesstimate" of China's total employees versus its working age population, the chart below points to a strange crossover by 2024.  Assuming China just continues to add about a third the employees they have been adding, China's working population will be greater than its potential workforce in about five years?  Now in most places, you would say that is impossible...and you would be right.
China Working Age vs. Retirees:
For perspective, consider China's working age population vs. those 60+ years old.  From 2013 to 2035, the working age population will decline by <124> million versus retirees growing by 218 million (chart below).
China's Importers:
But that's not the whole story, as there really are only two regions with growth among their under 65 year old populations (Africa and India (primarily Northern India)).  However, these two account for less than 10% of China's exports.  The other 90% of China's export markets are experiencing a rapid deceleration in annual population growth (red columns, chart below) of their under 65 year old populations and will likely cease growing prior to 2030.  Annual growth has declined from a peak of +52 million to just +8 million in 2018...and set to turn negative in about a decade when total under 65 year old population (blue line, below) peaks and begins declining.
Debt...The Final Frontier:
The final chart below shows the now declining annual change among China's under 65 year old population (columns), GDP (dark blue line), and the substitution of far faster rising total debt (red line) in lieu of the missing organic growth.  The now declining population of Chinese under 65 years old is being duped that they have GDP (or GNP) growth of 6.5%, when truly it is just the substitution of far faster rising total debt (in lieu of the missing organic growth) that is being counted as "growth".  This same substitution of debt for actual growth is true in America (detailed HERE), across Europe, Japan, and on and on but unfortunately, so many have falsely tied their hope for growth to China's wagon.

Up to 2000, China had undertaken "just" $2 trillion in total debt as population growth was robust, driving demand higher.  However, since '00, when China's under 65 year old population growth dramatically slowed, China has pushed out $38 trillion in new debt (primarily to its corporations) that has (and still is), built massive new debt fueled capacity for a collapsing domestic and anemically growing global consumer base...what could go wrong?  And now that the consumer base is shrinking, the debt issuance and resultant further build out in new capacity, apartment blocks, shopping malls, etc. etc. is likely set to go into a final mal-investment overdrive.
So, China's births have been collapsing for decades, China's child bearing population is collapsing, China's working age population is now falling, and so it follows that China's domestic markets have begun shrinking and this shrinkage will only continue to accelerate indefinitely.  Add to this, the export markets for 90%+ of their exports are hardly growing, and in about a decade, all but Africa and India's under 65 year old populations will likewise be shrinking.  Somehow, the Brookings Institute estimates that China's middle class will grow more than the total working age population that will be in existence?!?  None of this was even "mention worthy" in the Brookings Institute report, let alone problematic for their estimate of a massive increase in the middle class population.

From my viewpoint, no way in hell does this add up to 800+ million Chinese moving into the "middle class" by 2030, regardless how many trillions China throws away building new factories, roads, apartment blocks, and infrastructure for a population that is never coming!  In fact, more likely by 2030, we could well be looking at little to no growth...or even a declining Chinese middle class from todays levels.

As for India, unfortunately, the estimates for middle class growth are every bit as ludicrous, but that is for another day.