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Will China’s Demography Be Australia’s Destiny?

If there is a chart that should scare Australians it is this one:

 

China Working Age Population and Total Population Dependency Ratio

It may seem unusual as to why an Australian would be interested in the demographics of China, but demographics are destiny…

Why is that?

Well, GDP (gross domestic product) is as it sounds, the aggregate production of a nation which at is core is a made up by the number of people working (or the time they spend working) multiplied by their productivity when they work.

To grow a nation’s production (income) you can either increase the number of people working (or the hours they work) or increase the productivity of those people.

So when the number of people working starts going down, the only way to boost a nation’s income is by becoming more productive (which isn’t always easy).

Japan offers a comparable template of what China may experience in the coming years. In the early 1990s once demographics started working against you it becomes harder to maintain growth…

 

japan-and-china-working-age-populations

The growth in working age population lead to a rapidly growing economy in the 1980s that was the envy of the world (much like China today), but as can be seen it didn’t last into the 90s:

japan-nominal-gdp

 

The rapidly growing economy also lead to rapidly growing asset prices fueled by credit (presumably based on the premise that the recently experienced growth would continue into the future), but when income (nominal GDP) doesn’t grow commensurately with debt it ends in a bust, as it did in Japan when its working population peaked:

 

japan-nikkei-and-land-bubble

A peak in working population also tends to lead to the reduced need for the construction of more “things” of a modern lifestyle (ie apartments, airports, highways, cars, railroads, etc)…
That usually means you require less of the “stuff” (iron ore, coal, steel, cement, copper, etc) that you use to make those “things”.

I suspect this is why Japan’s steel consumption also peaked in 1990.

 

japan-steel-consumption

So, China…

Being both the most populous nation in the world and Australia’s biggest customer (for our mineral exports) makes us very dependent on China’s continued growth.  A such its working population peaking is potentially a VERY big deal for our nation.

It’s peaking is made more pressing for Australia given that we have one of the worst Net International Investment Positions to GDP ratios in the world and we potentially have our own malinvestments to reconcile within our economy and financial system.

More to come…