Wednesday, February 14, 2018

China's Further Vulnerabilities - David Archibald

by David Archibald

China's number-one goal remains conquering the rest of the world.  Thankfully, there are probably fewer than 300 million who could make a contribution to that effort

China is facing increasing economic headwinds over the next decade as its coal production tops out and then goes into steep decline. That will increase the cost of doing everything in China, and the country will become a less formidable trade competitor. Evidence that the Chinese economy has already topped out comes from ExxonMobil's recently released energy outlook which contains the following figure:

Figure 1: Heavy industry energy consumption in quadrillion BTUs.
It shows that China (the red line)'s energy consumption in heavy industry has fallen back to what it was in 2010. Growth is over. That is corroborated by China's railway statistics:

Figure 2: Goods transported on Chinese railways, 1990-2016.
The tonnage carried on Chinese railways is down 25% from its peak in 2011. Without the economy contracting by a similar amount, one possible explanation is that more power stations have been built inland at coal mines and less coal has to be transported.

Figure 3: China high technology exports, 1992-2016.
The revenue from China's high technology exports peaked five years ago in 2013. As the world economy has kept growing since then, that means that China has lost market share to the likes of South Korea and Japan.

Figure 4: China high technology exports as a percentage of manufactured exports.
As Figure 4 shows, the high value portion of China's exports peaked over a decade ago and has since been in decline. China has filled all the market niches it can fill, with diminishing returns.

Figure 5: Female population of China by age cohort, 1960-2016.
China still has a population problem: there are too many people, and this is the biggest potential system instability. Figure 5 shows the age makeup of China's females by age cohort showing how that has evolved since 1960. There are 28.9 million fewer females than males in the 15- to 64-year-old age group because that is how many were aborted once their parents found out that the pregnancy was going to produce a female. There are other primitive aspects of Chinese society, which we will get to. Figure 5 shows that China's peak fertility was in the 1960s, and then population growth fell during the Cultural Revolution up until the introduction of the one-child policy in 1979. It then rose again due to the crop of females born in the 1960s coming into childbearing age. Since the mid-1990s, the number of future mothers being born has been flat, apparently.

Figure 6: China female breeding cohort by age group, 1960-2016.
The number of potential mothers in China peaked nearly 30 years ago. While that has been declining, President Xi decided to undo that work by allowing parents to make applications for a second child in order to increase his popularity.

Figure 7: China fertility, 1960-2016.
Figure 7 shows that China's fertility had bottomed out until President Xi relaxed the one-child policy. Recent data show the beginnings of an uptrend, which might take Chinese population growth above the replacement level. The reason why this is important is that it means that Chinese GDP per capita is now as high as it ever will be, at best. China's recent economic growth and the lifting of a few hundred million people out of poverty was due to its export boom. Any growth from here will have to come from the Chinese selling more things to each other. But a great proportion of the population is still very poor and backward, and there is a structural reason for that. For example, most of China's rice crop of 144 million tons per annum is planted and harvested by hand in wet paddies. To be lifted out of poverty, those rice-growers have to find something else to do, and grain to replace the lost rice production would have to be imported instead. That is not going to happen, so at least 20% of China's population will remain very poor, indeed. China has given up on feeding itself entirely from its own efforts and is importing nearly 100 million tons per annum of soybeans, but that is to provide some meat, via pigs and chickens, to the Chinese diet.

Rural poverty is still endemic in China. The recent public face of that was "ice boy," an eight-year-old who arrived at school with his hair frozen. The latest figure on childhood stunting due to malnutrition is from 2010 at 9.4% of children under five, down from 21.8% in 2002 and 38% in 1992. China under President Xi has stopped publication of data that reflects poorly on the country, so the 2010 figure may be the last provided. Sanitation is still a problem in China, with 2.6% of the rural population practicing open defecation in 2015 and 0.6% of the urban population. This is data from a World Bank report.

China may still have problems with poverty, childhood malnutrition, sanitation, pollution, and water quality, but the country's number-one goal remains conquering the rest of the world. Thankfully, there are probably fewer than 300 million who could make a contribution to that effort.

Figure 8: China share of national income by 10% cohort.
As Figure 8 shows, half of China's population makes less than $6,000 per annum, and the bottom 10% get by on $4.72 per day on average. The government has to make sure these people are fed and controlled. Until they stopped publishing the statistics, China was spending more on internal security than on defense. China's poor are more of a drag on the economy than a source of cannon fodder. The last time China had a starvation event was due to Mao's Great Leap Forward, which killed 40 million people. Some of the survivors resorted to cannibalism to keep body and soul together. China's population has more than doubled since then. If the climate stays warm and the rains keep coming, China can keep its dream of world domination alive. But if the climate cools back to what it was like in the 19th century, then there could be a another generation of Chinese cannibals.

David Archibald's latest book is American Gripen: The Solution to the F-35 Nightmare.


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