China elec Jan15

China’s reported  7.4% GDP growth for 2014 was the lowest in 25 years.  But even so, it probably still overstates the true economic position.  How could China  possibly produce a final fiigure for GDP within just 20 days of 2015?

Electricity consumption, as Premier Li has advised in the past, is a far more reliable guide to the actual state of the economy. The chart shows how this has grown since 2008:

  • Demand was 3.4bn kWh in 2008 (blue column), and grew 6% (red line) to 3.6bn kWh in 2009
  • China’s massive stimulus programme in 2009 then caused it to jump 15% in 2010
  • Growth remained at a high level in 2011, at 12%, but then began to slow
  • It grew 6% in 2012 and 8% in 2013 as the transition to President Xi’s leadership began
  • Newly-published data shows 2014 growth halved to just 3.8%, a clear sign that the economy was slowing sharply

The key to the slowdown is the vast demographic change now underway in China, due to the collapse in fertility rates over the past 40 years.  As Yi Gang, deputy governor of China’s central bank has noted:

China’s demographic situation and labor supply have fundamentally changed. The ageing problem will intensify and its impossible for China to sustain double-digit growth rate.”

One key issue is that the working population is now in decline.  The number of people aged between 16 – 59 fell by 2.44m in 2013.  Within 10 years, the total population will start to fall.  The reason is that fertility rates collapsed from 6.1 children/woman in 1950 to just 1.1 child/woman in recent years.

This is nearly half the 2.1 replacement level necessary to keep the population stable over the long-term.

This fundamental issue has been disguised in recent years, as the total population was continuing to increase.  But this was due to life expectancy having risen by 50% to 75 years over the same period.

In the short-term, of course, this lack of babies helped to increase economic growth rates, as it meant more women joined the workforce.  But now China’s earlier demographic dividend is becoming a demographic deficit:

  • Most parents have just 1 child, so there are relatively few children under the age of 25
  • The rise in life expectancy is now delivering a vast cohort of people aged over 55 years

So China’s economy is now entering a new paradigm.  It has fewer young people, but increasing numbers of older people.  All those babies born before 1975 are now living a decade or more longer than their parents.  And their incomes are very low, with average urban pensions just $330/month – and rural pensions even lower.

This creates many dangers for the global economy.  Most policymakers are only just starting to recognise the far-reaching economic impact of today’s changing demographic profiles.  But it also creates major new opportunities for those companies prepared to redesign their business models.