Mystics & Statistics

Now, the Chinese economy has been on a tear for the last three decades. This graph cribbed from Wikipedia nicely shows this trend:

It was doing double-digit growth rates and is still growing 6-7% a year. As I point out in my previous blog posts, the Chinese armed forces are not really ready to invade a defended Taiwan, especially their air force and navy. This is going to take some time and money to build up. 

Such a build up sort of means that the economy needs to keep growing. Hard to justify lots of nice new shiny expensive high-tech airplanes when the economy is in the doldrums. As the economy has been steadily growing at 6% or more a year for 30+ years, their definition of doldrums may be pretty slanted. 

Now, relatively speaking, the Chinese have not been putting as much into defense as either Taiwan or the United States. Their defense budget is between 1.3% to 1.7% of their GDP. In contrast, the U.S. defense budget is between 3.4% to 3.7% of its GDP. Taiwan’s defense budget is around 2.3% of their GDP. As the Chinese economy grows, so to will their defense budget; I suspect we will know they are serious about changing the status of Taiwan if and when their defense budget expands to 2 or 3% of GDP.

But, the big question is whether the Chinese economy is actually going to keep expanding at 6% a year. A lot of people have been questioning that for a while, some people have been predicting that China is heading for an economic crash, some people have been claiming that the economy is artificially boosted, and other people are claiming that their economic statistics are artificially boosted. Regardless, they are facing a changing economic environment with India and other countries taking over the “cheap manufacturer” role. The transition to a more developed and growing economy could be a little fraught. 

There is one big ticking time-bomb the Chinese are facing, which is their demographics. I have blogged about this before (see below). The birth rate of China is below replacement rate, so the population is aging and the number of new young workers is declining. Old people are less productive and because of their health problems, sometimes more expensive. This is an economic drag with all aging populations unless one comes up with a Logan’s Run type solution. But, even a bigger problem will be the declining young work force. This is in part, a problem created by the one-child policy of China, which had good short-term benefits but has now created a long-term problem. Most likely the Chinese population will experience negative population growth by 2030. The population for China for 2021 is estimated at 1.44 billion. The United Nations predicts the Chinese population will be 1.36 billion by 2050. The real shortfall will be in the number of new workers.

Now, China is reacting to that with a new three-child policy. An article on that is below. China abandoned is one-child policy in 2015 (much too late in my opinion), went to a two-child policy and now have upgraded to a three-child policy. What is next: do they all become Mormons? This does look like an exercise in desperation. But, regardless of what the Chinese government does, I don’t think we are going to see a sudden sea-change in Chinese demographics over the next twenty years.

So, if the population starts declining by 2030…then does the economy decline with it? I think it will slow economic growth down. Hard to imagine they can maintain their 6% growth rates in that environment. They appear to have no quick and easy fix.

Now, a slow growth, stagnant or declining economy creates all kind of new problems. First, it is hard to increase or justify defense expenses when the economy is stagnant. If they are serious about creating the modern air forces and navy that they need to invade Taiwan, then they need to go on a spending spree for a decade or so. Chinese is looking at the population starting to decline by 2030. In 2020 they only had 12 million new births. By 2025 they will have over 300 million people over the age of 60. Does this mean that they have already “lost the bubble” for the chance to build up their military so as to take Taiwan?

Second, invading Taiwan is going to have a big negative economic impact. I have discussed this before, with perhaps a loss of 60-80% of their trade, 60% of their oil and a decline in their economy of 30-40% (just a guess). See the post below.

Third, stagnant or declining economies tend to lead to demands for political reform. This leads to either governmental reforms, leadership changes, civil unrest or even overthrow of the government. It was the extended period of economic stagnation that set the stage for the overthrow of Communism in Russia. We did go from a world in 1991 that had 16 Communist governments to a world with only four (China, Cuba, Vietnam and North Korea). Is this the final stage of that movement? One cannot rule it out. Hard to imagine the leadership of China is going to be focused on invading Taiwan if they are facing another Tiananmen Square (1989)

That said, there is a risk here in the danger to the government. Argentine invaded Falklands Island in part due to concerns about unrest in Argentina. In a sense, it was an invasion conducted for the sake of trying to bolster the government. This may not be a good example for China to follow, for not only did Argentina loose the war, but the government was overthrown and the leaders were arrested. The head of the Argentine junta was sentenced to a dozen years in jail. 

There is another example of a booming Asian economy that was going to surpass the United States. This is Japan. I have blogged about this before. To summarize: In 1995 the Japanese economy was 71% of the U.S. economy based upon GDP. In 2017 it was 25%.  I always liked this graph from that blog post:

Does history repeat itself?

Previous blog posts:

Invading Taiwan in the next six years – the fight? | Mystics & Statistics (dupuyinstitute.org)

Proposed Defense Budget for 2022 | Mystics & Statistics (dupuyinstitute.org)

Demographics of China | Mystics & Statistics (dupuyinstitute.org)

“We can’t afford it”: Chinese internet users have rejected Beijing’s new three-child policy

Where Did Japan Go? | Mystics & Statistics (dupuyinstitute.org)

P.S. Chinese economy grew 6.7% in 2018, 6.0% in 2019, 2.3% in 2020 and is projected to grow 8.5% in 2021 (source: World Bank and for 2021 IMF). In contrast, the U.S. economy grew 3.0% in 2018, 2.2% in 2019, -3.5% in 2020 (it shrunk), and is projected to grow 6.39% in 2021 (source IMF).

P.P.S.: A recent article on Chinese demographics that repeats what I have been saying: https://www.reuters.com/world/china/china-2020-census-shows-slowest-population-growth-since-1-child-policy-2021-05-11/

This subject would be best discussed by a proper “China watcher”, vice me. But… let me make a few observations on this. Politburo’s in the Soviet Union and in Red China have traditionally, but not always, been subservient to the leading political figure of the day. This leading figure is usually the Chairman of the communist party, although during the time of Deng Xiaopiing, he was the leading figure even though his official role was the Chairman of the Central Military Commission until 9 November 1989. While he held no official office after that he clearly was still considered the “paramount leader” and was still the senior leader in China up until his death in 1997 at the age of 92. Still, politburo’s sometimes have a significant role. The next leader invariably comes from it, and they are involved to some extent in choosing the next leader. The nature of the politburo does matter as they often reign in leadership and sometimes even try to overthrow leadership. So usually their operations are low-key and behind the scenes, until such time as they are not.

The current politburo of Chinese Communist Party consists of 25 people. But the power of the politburo has been further centralized in the Politburo Standing Committee of seven members. They are Xi Jinping (President of PRC and General Secretary CCP, aged 67), Li Keqiang (Premier, aged 65), Li Zhanshu (Chairman of National People’s Congress, aged 70), Wang Yang (Chairman of Political Consultative Conference, aged 66), Wang Huning (First Secretary CCP, aged 65), Zhao Leji (Chairman Dicipline Inspection, aged 64) and Han Zheng (Vice Premier, aged 67).

This is a pretty homogenous crowd, all aged between 64 and 70. Mostly likely, as Xi Jinping ages and retires, none of these people are going to be his long-term replacement. Over the next decade or two there will a rising generations of new leaders pulled up into the politburo. So the generational replacement for Xi Jinping is not in place yet, or at least he/she is not currently sitting on the Politburo Standing Committee.

This, of course, just reinforces my impression that the Politburo and therefore the leadership of China will be fairly cautious and deliberate for the next decade and perhaps for the next two decades. Potentially adventurous and risk-taking leaders are currently not in place, and they can only rise to the top as positions are opened. This may take a while.

This is a pretty straightforward discussion. Xi Jinping is 67 years old. It is not unusual for leaders to remain in power in dictatorships until they are well into the 80s. It is also possible that leaders in China can retire (it has happened recently). So, the four options are:

1. Xi Jinping remains in power for the next 20 years.
2. Xi Jinping is retired after 10-15 years (or sooner).
3. Xi Jinping is marginalized or replaced (this does not look likely now, but could happen a decade from now, although still not likely).
4. Xi Jinping could be gone from power tomorrow due to health reasons.

As outlined in a previous post, there are lots of reasons to believe nothing significant will happen in Taiwan as long as Xi Jinping remains in power. See: Will China take the risk and actually invade Taiwan? | Mystics & Statistics (dupuyinstitute.org)

So, the question is, will he be gone from power anytime soon (probably not likely) and if he is gone from power, then who will replace him. Lets say he is gone from power in the next 10 to 15 years. Then, what we are looking at:

1. He is replaced by another cautious and deliberate Chinese leader, which means Taiwan will not be on the front burner (i.e. more of the same).
2. He is replaced by a leader that actually just doesn’t care much that Taiwan is an independent entity (after all this is an issue that now dates back over 70 years).
3. He is replace by more adventurous, nationalistic, risk-taking or radical leader who is willing to take on such an invasion and the politburo is willing to go along.
4. He is replaced by a more adventurous, nationalistic, risk-taking or radical leader who is willing to take on such an invasion and the politburo is not willing to go along.
5. The politburo is packed with people more adventurous, nationalistic, risk-taking or radical and will push the leadership (who may not be able to say no) into such an effort.

It is pretty hard to determine what are the odds of this, but we will probably be staring at a leadership change in the next 15 to 20 years. I am no China expert, but my sense that there is at least a 50/50 chance that Xi Jinping will be replace by someone similar, or option 1 above. There is also at least a 50/50 chance that the politburo will remain cautious. They may serve to reign in a more adventurous leader. I think the odds of getting a risk-taking adventurous leader who has the backing from an acquiescent or supportive politburo is probably less than 25%. Again, I am no China expert and there is really no way to estimate the odds. This is a “guesstimate” shall we say.

On the other hand, a useful survey would be to examine what percent of Sovietologists who predicted that someone like Khrushchev would replace Stalin and heavily reform the Stalinist state? Also what percent of Sovietologists predicted the Brezhnev would replace Khrushchev and the reforms of Khrushchev would be reeled in? What percent of Sovietologists predicted that Gorbachev would rise to power and so radically change the Soviet state that it would collapse? I have never seen such a survey done, but I think I know generally what is the answer to this.

But based upon the patterns we have seen in Chinese leadership and the politburo, most likely nothing will significantly change in the next 20 years. On the other hand, it can…..

This leads us to Variable 2: What is the changing composition of the politburo?