CHINA

"Of all external changes, demographics - defined as changes in population, its size, age structure, composition, employment, educational status and income - are the clearest.  They are unambiguous.  They have the most predictable consequences."

So said the late business thinker and writer Peter Drucker.  And when we take a closer look at China's demographic trends, things do not look all that bright.

As is familiar to us all, China has in modern times experienced a remarkable economic transformation, particularly during the period since 1995 when year-on-year compound growth, measured in nominal PPP (Purchasing Power Parity) dollars, has exceeded 11%, a feat unrivaled by any other nation over such an extended period of time.  How was this possible?

By mobilizing a vast, under-employed and cheap labor force into becoming the workshop to the world's rich economies, and in the process attracting huge amounts of inward capital and technology investments from rich-world corporations.  This economic expansion has been financed through an exceptionally high domestic savings rate, as a well as through positive foreign current account balances cumulatively exceeding 5.0 trillion dollars in the period since 1995.

How likely is it that this state of affairs will continue?  Time for a look at China's demographics.

In PPP terms China is already the world's second largest national economy and is slated to overtake number one, the United States, some time during the current decade.  But GDP per capita tells an entirely different story.  Here we find China in 120th place, with its nearest neighbors on the world rankings being Cook Islands, Jamaica, Monserrat and the Maldives above, and just below we find Equador, Belize, Bosnia and Palau.

 In other words, China is a large - but poor - country and is quite likely to remain that way.  Here is why.

Thanks not the least to its "one child" policy, China has long suffered from an exceptionally low birth rate, and the trend points toward further deterioration.  As a consequence of the same policy there is also a marked unbalance between the number of adult men and women.  Some 40 million Chinese will never find a mate.

The country's total population is in the process of peaking, but more disturbing pictures emerge when we look at age group distribution trends.The productive 15-64 years age group has already peaked at 73.6% of total population and will have fallen to 64.5% by 2030 and to 56.6% by 2050.  During this same time span the over-65 age group will have grown from a current 8,9% to respectively 22.2% and 33.2%.  In other words, China will have grown old before it has had time to become rich.

The already diminishing 15-64 age group will have serious economic consequences, because China's labor force participation within this group is already an extraordinarily high 83%.  In comparison we find Germany with 81%, Brazil with 77% and the United States with 73%.

The China-as-world-workshop policy, the linchpin of economic globalization, has been a main cause of the serious imbalances we are now experiencing both in world labor markets as well as world financial markets.  These imbalances are currently mainly manifesting themselves in rich world countries, but they will impact China soon enough.

It has long been pointed out that China needs to change tack and steer its economic development towards local consumption rather than savings, investment and export of manufactured goods.  The problem is that this is much easier said than done.

A fairly standard national GNP structure is somewhere around 80% consumption and 20% gross investment.  In 2011 China we find 46% consumption and 54% investment.  On the supply side of the equation, we find 47% of value creation coming from the manufacturing sector.  In terms of the national economy, this represents a huge over-capacity which can never be absorbed locally.

An economic restructuring of this magnitude could only lead to massive unemployment and serious social disturbances, to which history has taught us that the Chinese society is prone.  Another risk factor in this direction is the country's rapidly growing income inequality as measured by the Gini index.  Over a period of just two recent years China's position on this index has deteriorated by 16 percentage points.

And there is a diminishing probability that China's excess industrial capacity will continue to be absorbed by the rich-world economies, in the short term because they will not have the money, and in the longer term because the world  manufacturing labor market will have to be brought back into balance to avoid unacceptably high rich-world unemployment rates.  We already see signs of this happening in the United States, as steeply rising labor rates and general logistics costs are beginning to erode China's low cost advantage in some industrial sectors.

While total population is peaking, the rate of urbanization will continue unabated.  By 2030 China's urban population will have increased by some 50% to nearly one billion people.  Imagine the infrastructure investment requirements this will lead to.  Where will the money come from, as exports and inward investments dry up?  And does China have land and water resources to adequately feed such a large urban population without massive imports of food and energy?

Finally, in China there is hardly any health care and social security net to deal with more than 300 million old people by 2030.  Where will the money for that come from?

There seems to be current consensus that China will continue to grow at a blistering pace, no longer at 11% per year but maybe at 7%.  I would not bet on it.