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Why Demographics Show China Poses No Long-Term Threat to the US


China's seemingly endless secular growth will hit a brick wall thanks to its one-child policy.

To the birthers go the spoils.

I read a fascinating interview with generational theorist Neil Howe last week about Earth's population hitting 7 billion people, and about how current demographic fundamentals suggest we may never get to 8 billion. Much of the world's seeming current population growth is due to a reduction in overall deaths as baby boomers age healthfully, not any real increase in births. Nowhere is this more apparent than in China.

China has gone through a dramatic fall-off in its fertility rate since the 1950s, dropping from around six children per woman down to 1.54. In terms of fertility rates, China is now ranked 180th in the world, with factors like the imposition of the one-child policy in 1978 playing a part.

As a result of this rapid change in birth rates and still-rising standards of living, China's demographic skew looks much different than the US' does, with far fewer retirees, a big hump in the middle, and fewer children. In the following chart, each bar represents a five-year age bucket, so "0" represents the percentage of the population age 0 to 4, "5" represents 5 to 9, and so on.

Think about this as if you were the superintendent of a local K-12 school system. Every year you're planning resource allocation – number of schools, teachers, classrooms, and supplies needed. These are all mostly a function of the number of students enrolled. It's easiest if the number of students graduating equals the number of new students enrolling.

In the US, as the blue bars show, we have roughly equivalent numbers of people in the school-age and working-age buckets. In 2010 there were 41 million Americans between the ages of 35 and 45, and 40.6 million Americans age 10 and under. That makes a public planner's job relatively easy. In China, this is not the case. As of 2009 there were 243 million Chinese between the ages of 35 and 45 (everyone younger than this was impacted by the one-child policy), and just 152 million Chinese age 10 and younger. It's as if in the last 10 years China neglected to give birth to two and a half Californias.

This will not be a problem for China right away. If anything, it's a short-term benefit because in urban societies, children are expensive, requiring child care and schooling, and act more as liabilities than assets. It's once this class enters the work force that the pain will be felt. As this chart from Goldman Sachs shows, China's working age population already is peaking out now and will begin declining soon, just as Russia's and Japan's already have.

And as Russia and Japan have showed, and Europe is showing, modern societies have yet to figure out a way economically to grow while the population is falling. It's the ultimate deflation. Strategically, China's public policy goals will have to shift from rapid GDP growth and infrastructure to building a social safety net for an aging population with smaller families less able to care for them. For those concerned about an eventual military conflict between the US and China, it's hard to imagine China sending millions of young men off to die in battle when the country will be starved for young labor within a decade.

This is not to say that China is likely to crash this year, next year, or even a decade from now. China's importance in the world economy will continue to grow, with plenty of relative room for improvement in per capita GDP. But at some point in the next three to five years, Americans will realize that China does not threaten the US' status as the world's sole economic and military superpower, and that may be a major psychological turning point in our transition to the millennial secular bull market.

Twitter: @conorsen
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