China Following Japan

Many believe that the Chinese economy passing the United States in GDP was a foregone conclusion. In fact, it was thought it would happen by 2030.

Now people are questioning whether it will take place.

That is not dissuading many from touting that it is still going to happen in the early 2030s.

On this, I disagree.

In short, the China miracle is coming to an end. The run actually ended a decade ago. While the Chinese GDP has been up, much of that is attributed to infrastructure spending. The Chinese just kept building, even if they didn't need it. That is the easy way to keep pumping the GDP numbers.

We Have Been Here Before

If we jump in our time machines and go back to the 1980s, an era when U2 and the hair bands reign supreme, we had the land of the rising sun. At that time, the thinking was that Japan would overtake the US as the world's largest economy.

Probably the crown gem in the Japanese portfolio was Rockefeller Center. Americans were watching the lighting of the Christmas tree and it was owned by a company in Japan. This was the sentiment at the time.

So what happened?

The Japanese economy went into a deflationary death roll that took everything down with it. We saw real estate, the job market, and stocks all tank. Few ever got back to the high.

Here is a chart of Japanese real estate. Notice how it is still far below its highs.

Source

The stock market is the same. It is still almost 30% below its top level.

Basically, the Japanese miracle came to a screeching halt. That country as suffered a great deal since then.

Cannot Defy The Demographics

We make a big deal about demographics because they cannot be overcome. They are very difficult to surpass since it is a central part of economic productivity. Without people, output is difficult. This can be offset to some degree by technology. What cannot is consumption. People are needed to consume, young people.

It is well known that Japan fell off a demographic cliff starting in the mid 1900s. It is only getting worse. We are now seeing the population starting to decline. Before people die out, they get old which is economic devastation.

Here is what the demographic tree of Japan looked like as of 2016.

Source

There is a serious absence of young people. They have as many people in their 70s as they do in their 50s. Here we see a great financial burden placed on the economy having to support the older generations. It is a problem much of the developed world is going to encounter.

This includes China.

Here is the 2020 demographic tree for that nation:

Source

As we can see, the largest segment of the population is between 50-60. Where will they be by 2030? Obviously, 10 years older puts them between 60-70. Not exactly the age bracket to build a productive economy around.

What is scary is this chart is not unique. Here is the one for Japan in 1990.

Source

Japan, in 1990, was a tad bit younger than China is today. Nevertheless, within a decade, the country was mired in economic abyss. We can expect the same thing for China.

This is the lightning rod many are overlooking. Take the 2020 Chinese chart and add 15 years to it. Move those wide patches of people up 15 years. The top of the largest segment will be in their mid 70s. Without the younger people at the bottom, the dream of a consumption based economy is simply not there.

So for people who feel that China will surpass the US in GDP, please explain how it is going to get around this situation. This is impossible even in the best of circumstances. The problem for China is that it is the world's largest exporter, at a time when the other developed nations are facing a similar problem in terms of their own demographic picture.

Who is going to buy the Chinese stuff if there are fewer people?

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