ARE THE BRICs LOOSENING? IS CHINA BREAKING?

Demographics is destiny. ~ Arthur Kemp   
 

Are the BRICs loosening? Are Brazil, Russia, India and China departing from their breathtaking economic climb of the recent past? Is that the sound of breaking China I hear? It's not a familiar sound. Until recently, China and the rest of its BRIC compatriots have been on a historically-impressive streak of macroeconomic growth. In 2008 the BRICs accounted for two-thirds of world economic growth. In 2011 they accounted for about 50% of it, in 2012 a bit less than that. Many reports have credited their notable economic growth (and that of other "emerging" nations like Indonesia) with mitigating the harmful economic consequences of the slumps in "advanced" countries like the US and the European Union(EU).

Look at the "leader" of the BRICs, China, to see what's been happening. In 2012, China's GDP (PPP) was $12.61 trillion (T) and ranked 2^nd to the US. The US 2012 GDP (PPP) was $15.94T, so China's GDP was almost 80% of the US. On a per capita basis the difference between these two nations' GDP is much broader. The US GDP/capita was $50,700 (14^th in world); China's was $9,300 (123^rd), only 18% of the US.

Based on its extraordinary growth, economic commenters began guessing when the Chinese GDP would surpass the American. It became a popular sport several years ago. Few said it would take China longer than a decade to surpass the US GDP. The most recent information may suggest it could take a bit longer. However, from an historical perspective, China may remember the mirror-image of this situation. Towards the end of the 19^th century the US economy overtook China’s to become the largest in the world. Is it China's turn now to overtake the economic leader? Perhaps, but not for a while more.

Given the BRICs' increased economic stature, macroeconomic changes in not only advanced but also emerging  economies have a significant impact around the planet, especially for nations like the BRICs that rely on international trade for much of their domestic growth. Just ask Australia. World trade growth fell to 2.0% in 2012 — down from 5.2% in 2011 — and is expected to remain sluggish in 2013 as the economic slowdown in Europe continues to restrain global imports (and thus exports as well).

In 2010 China's year-on-year GDP growth rate was an impressive 10.4%. By contrast, the US GDP average growth rate during 2010 was 2.5%. However, since 2010 both nations' growth rates have declined; China's more than the US, although China's growth remains multiple times larger than the US. See the chart below. Over the first 3 quarters of 2013 China's GDP growth lessened to 7.7% and US growth tumbled to dismal 1.8%.

With the ever-increasing inter-dependency of individual national economies – aka, globalization – it is not surprising that the world's 2 largest economies have a tendency to move somewhat in step, even if it is now lesser growth.

Economic growth in the BRICs' economies has hit bumps of many sorts. In many nations (not just the BRICs) these challenges include the double-I's – inflation (too much) and infrastructure (not enough) – as well as corrupt, bloated and tentacular bureaucracy.

Another challenge that influences the longer-term economic and social future of the BRICs, and every other country, is changes in demography. Demography refers to the size, growth and characteristics of a nation's population. China, as well as Russia and several EU nations, may be more vulnerable from a demographic perspective than other countries in the coming decades.

The table below illustrates several demographic characteristics of the American and Chinese populations. Four statistics cited in the table are of particular consequence for China. First, China's

Population Characteristics of the US and China
Statistic	US	China
Population	316.7M (3rd)	1.35B (1st)
Population growth rate	0.90% (123rd)	0.46% (155th)
Median age	37.2 years	36.3 years
Life expectancy at birth	78.62 years (51st)	74.99 years (100th)
% of pop. 0-14 years	20.0%	17.2%
% of pop. 55-64 years	13.9%	11.3%
Birth rate per 103 population	13.66 births (123rd)	12.25 births (161st)
Fertility rate per woman	2.06 children (121st)	1.55 children (184th)
Sex ratio 0-14 yrs (male/female)	1.04	1.17
Source:  CIA World Factbook. World rankings in parentheses.

population is the largest in the world and over 4 times as large as the US. China's population now represents slightly less than one of every five human beings on Earth.

Second, China's population growth rate is quite low – ranked 155^th in the  world (out of 233 nations) – and is one-half as big as the US. This is a direct consequence of China's unique one-child-per-family ("Family Planning Program") population control policy, initiated in 1979. According to the government, the one-child policy has reduced the growth of the country's population by 400M people – that's 25% more than the entire current US population.

Nations that have negative population growth include Russia, Japan and several European nations. The demographic and the economic destiny for these nations will be quite stark. So stark that several of these countries are offering cash payments to families to have one or another child to promote population growth.

Third, the fertility rate of Chinese women – 1.55 children – is especially low, ranked 184^th in the world (out of 224 nations). The fertility rate is the average number of babies born per woman who is between 15 to 44 years old. The replacement-level fertility rate is 2.1 children, assuming no immigration. If unchanged, China's current fertility rate will eventually cause its population to diminish in absolute numbers.

China is now one of the most rapidly aging countries in the world. This will have numerous consequences.

Fourth, the sex ratio (male/female) of children in China between 0 and 14 years, 1.17, is the highest in the world; meaning there are way more young males than females. By 2020, China expects there will be 24 million more men than women.

This world-leading and disparate male/female ratio means there are – and will likely continue to be – increasing social tensions. One in three young men aren't married; one in five young women are unmarried. Paradoxically, there are increasing numbers of "leftover women" – a term referring to women unmarried in their late 20's – not so much because they chose to not marry, but because they have difficulty finding a suitable mate in a nation where many men "marry down" the socio-economic ladder (termed hypogamy). This means it is more difficult for late 20 year-old A-level (successful, well-educated) females and D-level males to find suitable spouses. Compounding this problem is that China, like other Asian nations, has a long history of a conservative and patriarchal view of marriage. The traditional family structure includes marrying at a young age and female hypergamy. Once a woman reaches her late 20's the vast majority of Chinese men consider her too old to marry.[1] From a relationship perspective, life's indeed a bitch for young, but too old women, especially if they're A-level females. China's unbalanced demography may hinder its future economic growth.

At the same time that China will be facing the social and economic consequences of its demographic imbalances, it is embarking on a fundamentally different macroeconomic growth strategy. China is by no means breaking, but it is going to be changing.

China's macroeconomic decision-makers want to shift from relying on public investment as the mechanism for growth and move towards more consumer spending, which is a far more typical strategy in the world's other largest economies. Last year, investment accounted for over 48% of China's GDP, funded in large part by the government's forced-savings policies for its citizens. This very substantial amount of investment – much of which has been provided to its State-owned enterprises (SOEs) – has been the economic custom in China for decades. Household consumption accounted for only 36% of China's GDP. In contrast, the US GDP is comprised of 71% consumption expenditures and 13% investment. The US has been a consumer-oriented economy for a long time. China's has been investment-driven.

Re-balancing its economic growth priorities towards consumer spending within its demographic changes will take significant effort and time on the part of many Chinese institutions. There have already been many aggrieved folks in China's SOEs; there will be more as policies are modified. For a nation of China's size, this will be a Herculean task made that much more challenging by the above-mentioned, exigent demographics. Altering demographic norms requires modifying cultural standards that are far trickier and often take at least a generation to implement.

Will China be able to smoothly shift its source of economic growth while continuing to grow rapidly and lead the BRICs? Time, and demographics, will tell.

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[1] In a 2010 Chinese National Marriage Survey, it was reported that 9 out of 10 men believe that women should be married before they are 27 years old. The average age of first matrimony for Chinese women is 22.