China’s population problem will hit its economy, report warns

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 to accelerate, at best.

“Most analysts think China will rebound,” said a recent report by Frost Investment Advisors titled Cracks in China’s Economy. “That may be true, but we believe there are cracks in the foundation.”

Of course, many investors are already familiar with the country’s out-of-control real estate debt, as evidenced by the problems of the Evergrande group. And they may be aware that the communist country is severely cracking down on business by increasing regulatory actions. This should come as no surprise to many people as China is a centrally planned economy.

Either way, these two issues, which the Frost report also raises, could probably be resolved in a relatively short time, if the government really wanted to. I don’t think the Chinese leadership wants to correct regulatory excesses, but they may have to tackle soaring debt whether they like it or not.

Where are the Chinese babies?

However, the Frost report highlights a more thorny problem: the impending shortage of highly productive workers. In other words, there has been a shortage of manufacturing babies in China for decades and that means there is a population explosion.

“China’s population is aging rapidly, and the most productive members of the workforce are expected to retire in less than 15 years,” the Frost report says.

It’s getting worse.

“The country’s birth rate has declined dramatically over the past 20 years and is showing signs of flattening in the decades to come,” the note continued. An accompanying chart shows that the death rate in the country already far exceeds the birth rate.

This is important because a country’s economy can only grow when its population increases or when its productivity per worker increases. As the population shrinks, all economic growth will depend on the productivity of workers.

And this is where the shoe pinches, because how will that productivity increase as big companies become more cautious about investing in China and when the country’s own government hinders growth, a boom in unnecessary regulations will there be? It probably won’t, which means that sooner or later the second economy will start to contract.

“Many Chinese may age well before they have a chance to build the assets they need to comfortably retire,” the report said.

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