In a series of blogs, I’d like to share with you some personal observations about what’s happening in China based on my recent visit to Beijing, Xi’an, Shanghai and Hong Kong. While there as a tourist, I made a point of talking to the locals and keeping my eyes and ears open for anything that would help me figure out whether this Chinese growth story will save the world economy or whether it’s a bubble ready to burst.
My hope is that these blogs will arm you with snippets and background color that you can use in your written and verbal communication with clients, prospects and the media.
If you would like a revised ghost-written version of this blog that is suitable for your client newsletter or other client/prospect communication, please click here to visit the Peak Advisor Alliance website and download a clean copy of the complete letter from the Free Tools section. Enter “china1” as the code. As appropriate, please send it to your compliance department for review.
Given the importance of China in the world’s growth story, this is an opportune time to send your clients a few letters about what’s happening in the Middle Kingdom. You can plan on a new China letter about every two weeks for a total of three letters.
I've a Feeling We're Not in Kansas Any More
One evening, after a long day of playing a tourist in Shanghai, China, I flipped on the TV and was pleased to find CNN. After a few minutes of reveling in catching up on world events, a story came on about Chinese artist and political dissident Ai Weiwei. That day, Weiwei was released by the government after nearly three months of detention for “alleged economic crimes.” Just as soon as the story about Weiwei came on the air, my TV screen went black. About 90 seconds later, CNN returned to the air in the middle of a new story.
I had just witnessed my first example of Chinese TV censorship!
China, of course, has been in the news for years as its economy has roared and moved the country to the second largest economic power behind the United States. Yet, for all its might, there are some glaring holes that might trip it up over the coming years -- with media censorship being just one.
China Rises Again
China’s surge is really a case of déjà vu. For much of recorded history, China was the world’s largest economy. Even into the early 1800s, it accounted for 30 percent of the world’s GDP, according to The Economist. But like many empires before it, China spectacularly flamed out over the next century. By the mid-1970’s, the disastrous reign of Mao Zedong had come to an end and China was near rock bottom.
In 1978, new leader Deng Xiaoping laid out a vision of economic reform that has propelled China to unprecedented growth. Since then, China has massively reshaped the world order as its growth and demand for resources affects everything from auto production, to corn prices to funding the U.S. budget deficit. Earlier this year, China overtook Japan as the world’s second largest economy behind the U.S.
With that very brief historical background, let’s review some facets of China’s phenomenal rise and what that may mean for your investment strategy and your clients’ future. In today’s blog, I’ll look at demographics.
Incredibly, China’s GDP has grown at an average annual rate of 9.3 percent since 1989, according to Trading Economics. However, changing demographics could cause this growth to slow in coming years.
You may be surprised to know that between 2000 and 2010, the U.S. population grew faster than China’s (9.7 percent in U.S. vs. 5.8 percent in China, according to the Financial Times). For the past 20 years, China’s economic boom has been partly fueled by urbanization—rural folks moving to the cities in search of higher paying jobs, plus a supposedly endless supply of cheap young workers. Turns out that supply may be coming to an end.
China has had a one-child policy since 1979 and it resulted in the “non-birth” of about 250 million babies, according to Time Magazine. As a result, China’s population is aging rapidly. Today, 12.5 percent of China’s population is over 60. By 2020, it will hit 20 percent and by 2030, it will hit 25 percent, according to The Economist.
Worse yet, the working age population will start to decline in about 2015, according to the United Nations. Fewer workers supporting a growing elderly population is not a recipe for economic growth.
Of course, China could reverse its one child policy and rev up population growth, but that would likely cause other problems such as food shortages or environmental issues.
As the demographic shift causes the labor market to tighten, wages have already started to rise, according to The Economist. That puts pressure on inflation and makes the country less competitive.
While it’s easy to look at China’s growth over the past 30 years and extend it for another 30, changing demographics is one of several hurdles that could put the brakes on growth.
In my next blog, I’ll look at the challenge of moving China’s economy from one led by exports and investments to one led by consumption. As a preview, I’ll talk about the perils of relying too much on infrastructure investments and how that could lead to excess capacity and bad debts.
As mentioned earlier, for a revised ghost-written version of this blog that is suitable for your client newsletter or other client/prospect communication, please click here to visit the Peak Advisor Alliance website and download a clean copy of the complete letter from the Free Tools section. Enter “china1” as the code. As appropriate, please send it to your compliance department for review.
Steve Sanduski, CFP®, is the Managing Partner of Peak Advisor Alliance, a financial advisor coaching and practice management resources organization. He is also a New York Times bestselling author and co-author of, Tested in the Trenches: A 9 Step Plan for Building and Sustaining a Million-Dollar Financial Services Practice. To learn more, visit, http://www.peakadvisoralliance.com/ and http://www.truewealthcommunity.com/.
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