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Leith van Onselen
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An Australian currently working for a leading investment bank. I have previously worked as an Economist at the Australian Treasury and a Senior Economist at the Victorian Treasury.
My blog:
  • China's Demographic Time Bomb


    The 21st century will be the century of old age, where declining birth rates meet longer life expectancies. Nowhere are these demographic shifts occurring as quickly as in China, which is facing demographic challenges that threaten to slow its long-term expansion.

    China’s demographic headwinds stem from its ‘one child policy’, which was brought into effect in 1979 and is credited with preventing around 400 million births from 1979 to 2010. This policy initially produced a population pyramid optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age).

    This relationship is shown in the below chart, which maps China’s dependency ratios – i.e. the ratio of the non-working population, both children and the elderly, to the working age population.  As you can see, the precipitous fall in China’s birth rates from the mid-1970s caused a sharp fall in the dependency ratio which, other things equal, increased China’s growth potential.

    However, the demographic blessing provided by the one child policy is beginning to turn into a curse. As China’s population ages, an inverted pyramid is beginning to develop, whereby too few workers might be left supporting an army of retirees (see below chart).

    In many ways, China’s demographic trends are closer to its developed nation counterparts. Of its 1.33 billion citizens, 12% are currently aged 60 plus. However, over the next two decades the retired segment will grow rapidly, with those aged over 60 years doubling to around 24% of the population (see below chart).

    Marshall Meyer, a professor of management at Wharton University of Pennsylvania, recently described some of the potential implications arising from China’s ageing population.



    Thanks to the inverted pyramid…fewer workers will be available to expand manufacturing output as the number of retirees gets larger. In addition, China will have to spend more on social security and medical care. Yet under the current system, it is already “very hard to collect benefits,” suggesting that “a lot of people will have to draw down on their savings.” Little support from family members can be expected in a society where there is one grandchild for every four grandparents, he adds, which means that the continued aging of China “will put [significant] stress” on its society.

    Meyer predicts that the Chinese workforce will start to shrink in absolute terms in 2015. Already, he notes, younger workers — those under the age of 25 — are declining in absolute numbers. All other things being equal, when the percentage of older workers increases, labor costs increase, since older workers are less productive in manual jobs…

    So far, China’s growing prosperity has been based largely on its ability to manufacture lower-end products at competitive prices. But as costs rise in China, the country has to move up the value chain…

    To date, China’s economic model has been based largely on its abundant and low-cost supply of labour, which has enabled it to become ‘manufacturer to the world’.  However, if China Bears like Jim Chanos and Vitaliy Katsenelson are correct, and China’s manufacturing margins are already razor thin, then the gradual reduction of labour supply stemming from its ageing workforce could eliminate China’s traditional comparative advantage in the cost of labour, possibly resulting in it losing its manufacturing base and/or exporting cost-push inflation abroad.


    Whilst demographic shifts are inherently slow moving and less of an immediate concern than other issues afflicting the Chinese economy, these longer-term challenges are, nevertheless, significant and are likely to alter the path of China’s economic development.

    This article first appeared on MacroBusiness.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Feb 03 10:13 PM | Link | Comment!
  • UK deleveraging: "standard of living to plunge at fastest rate since 1920s"

    The Telegraph last week published a disturbing article on the dire state of the UK economy:

    Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again.


    Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned.

    With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years, he claimed.

    Mr King issued the warning in a speech in Newcastle upon Tyne after official figures showed that gross domestic product fell by 0.5 per cent during the final three months last year. ..

    There were fears that the country was poised to slip back into recession, defined as two successive quarters of negative growth. Economists said the situation was “an absolute disaster”. ..

    Disposable household income has been hit by sharp increases in the cost of food, fuel and tax, coupled with restricted wage rises for most workers. Last year, take-home pay fell by about 12 per cent, official figures showed, and the trend was expected to continue in 2011…

    “In 2011, real wages are likely to be no higher than they were in 2005,” he said. “One has to go back to the 1920s to find a time when real wages fell over a period of six years.

    “The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.”…


    Addressing the problems of borrowers, he added: “Households and small businesses with little housing equity may be unable to borrow at all or are able to borrow only in the unsecured market – where rates are much higher than before the crisis.”

    The UK’s precarious position is the direct result of household deleveraging following the bursting of its housing/credit bubble in 2007/08.

    I explained the leveraging/deleveraging process in an earlier post:

    When house prices rise, [households] feel richer, which spurs consumer confidence, spending and employment growth. A positive feedback loop can develop whereby households take on more debt, causing housing values to rise further and the process of confidence, spending and employment growth to repeat.

    But home values and debt levels can only rise so far and, sooner or later, the process of debt feeding asset prices feeding confidence, consumer spending and employment growth goes into reverse (i.e. deleveraging). House prices stop rising (or fall) and highly-indebted households begin to reduce their spending and repay debt. Sectors reliant on consumer spending contract and unemployment rises. Consumer confidence falls, leading to further frugality, house price reductions and job losses.

    As shown by the below chart, UK households went on an almighty borrowing binge over the 2000s, as evident by household debt to disposable incomes rising from around 100% in 2000 to a peak of 161% in Q1 2008.  However, households have started repaying debt, with debt to disposable incomes falling to 149% in Q1 2010. 

    As expected, the UK’s consumption-based economy was firing on all cylinders whilst the positive feedback loop of debt feeding asset prices feeding confidence, consumer spending and employment growth was in motion. However, the turning point was reached in late 2007, when UK house prices began falling, thus commencing the deleveraging process (see below chart). 

    UK households suddenly felt poorer, eroding consumer confidence and their willingness to spend (the ‘wealth effect’). And with asset prices falling, and many households moving into negative equity, they had little choice but to tighten their belts and begin the process of debt repayment.

    This process of UK households shifting from borrowing/consuming to saving/debt repayment is illustrated clearly by the below Bank of England chart, which shows housing equity withdrawal (HEW) moving from positive to negative in Q2 2008. According to the Bank of England, households have injected £49.7bn into housing equity since the HEW measure turned negative.

    And with the banks suffering from high levels of non-performing loans and falling collateral values following the housing correction, credit conditions have tightened significantly, especially for those with high loan-to-value mortgages and renters (see below Bank of England chart). Households are simply unable to increase their borrowings even if they wanted to. 

    Put simply, the UK economy will remain moribund for years to come as the deleveraging process slowly works its way through the system. Welcome to the new normal.

    Article first appeared on MacroBusiness.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Feb 01 12:25 AM | Link | Comment!
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