The Challenges Ahead For China's Economy

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Summary

  • Chinese economy may do modestly better in the second half of 2022.
  • Longer term, the primary headwind for the Chinese economy lies in demographic patterns.
  • The implications for commodities are not dire, as China will remain a large and growing economy, but the decades of outsized growth in commodity demand may be over.

Multi exposure of virtual abstract financial graph interface on Chinese flag and sunset sky background, financial and trading concept

Igor Kutyaev

By Blu Putnam

At A Glance

  • Commodities such as corn, aluminum, and oil are off their highs as China's growth slows
  • Demographic patterns could be a major constraint to China's already struggling economy

China's economic growth stagnated in the second quarter of 2022, reflected globally as commodities such as corn, aluminum, oil, and others have come off their recent peaks.

What's Next for China?

In the second half of 2022, the Chinese economy may do modestly better as:

  • the government pushes new loans to state-owned enterprises to accelerate infrastructure projects;
  • some steps are taken to ease the burden on consumers of the property debt overhang;
  • and COVID-19 protocols are modified or rescinded.

China Demographics shifts

Author

Longer-term, though, the primary headwind for the Chinese economy lies in demographic patterns. The birthrate is low, while people are living longer. According to the International Database of the U.S. Census Bureau, the growth rate of China's population may turn negative late in this decade. By 2030, 18% of the population is expected to be over 65 years old, and only 15% may be under 15 years old. The working-age population is clearly shrinking.

China Real GDP

Author

Demographics is not necessarily destiny, yet without a growing labor force, China appears headed for a decade or more of average real GDP growth of 3% or so. Compare this to China's 10% real GDP growth recorded from 1990 through 2010 during its period of rural-to-urban migration and large gains in labor productivity. The implications for commodities are not dire, as China will remain a large and growing economy, but the decades of outsized growth in commodity demand may be over.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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