A number of thought pieces have been published recently considering whether China’s economic malaise is deeper than just a prolonged Covid-related hangover. Is China facing the same kind of peak economic growth that led to Japan’s lost decade and subsequent low growth? The parallels are plentiful but inexact. As China is as important to shipping today as Japan was in the 1980s and 1990s, it makes sense to view shipping’s demand outlook through this comparison.
Is China'a GDP Growth Approaching Stall Speed as Japan's Did in the 1990s?
A key difference between China and Japan is of course population. Japan’s population peaked in around 2010 at about 128 million people and has decreased only slightly so far to 126 million people, though that reduction is expected to accelerate as birth rates continue to underperform mortality, leading to a population forecast of 106 million people by 2050 and 75 million by 2100.
China’s population peaked at around 1,413 million in 2021 and fell by 850,000 people in 2022. The fertility rate of 1.66 children per woman is well ahead of Japan’s 1.3 and much higher than South Korea’s 0.81 while the world average is around 2.1 – just about the ‘replacement rate’ which politicians around the world find it harder to encourage as women’s economic lot improves and the cost of raising children requires two working parents, leading to smaller families. There are about 65 million fewer Chinese aged 0-19 than aged 20-39. China’s population could be as low at 1.0 billion by 2050 and the central UN prediction is for it to reach 767 million by 2100 though the Chinese Academy of Social Sciences, using a prediction of 1.1 children per woman, predicts only 587 million by 2100.
Add in the pandemic, which is not yet over, and a generous helping of climatological millenarianism and it is not hard to intuit that the lower end of global population forecasts is becoming more likely. This poses a problem for China as its main economic resource to drive inward investment and growth has been its vast pool of cheap labour.
Japan built its post-war economic success on operational research (Deming principles of quality control in particular), Toyota production principles (including strict inventory management) and the adoption of solid-state transistor technology. It became a world leader in automobiles, ships and consumer electronics. Its economic growth was led by manufacturing and exports, with exports growing at an annual rate of more than 15% in the 1960s. This was achieved through huge productivity growth, itself a function of investment in technology rather than on dependence on cheap labour. In this regard, Japan’s highly educated workforce and emphasis on technology differentiates it from China.
Japan’s urban population was 63% in 1960. It reached 78% in 1995, the year of peak economic output (counting in 2021 dollars), but went on to grow to 92% by 2022. Following from a similar starting point but 20 years later, China’s urban population was 19% in 1980 and had grown to 62% by 2022. China’s urbanisation process seems to be maturing at a lower percentage of the overall population than Japan’s did. Will China’s urbanised population peak at an earlier stage of development? Most developed economies have at least 80% urban population. But China’s further urbanisation might come not so much from migration from rural counties to new cities as much as it comes from faster stagnation in rural births than in urban births – urbanisation by default, you might say.
This may already be happening. Wang Dan, associate professor of education at the University of Hong Kong, says that roll calls at rural schools are falling fast and that a number are closing. “From the perspective of individuals and families, moving to the city offers the possibility of higher incomes and greater opportunities for their children. As the rural labour and brain drain intensifies, however, rural communities are driven further into decline, worsening the structural inequalities between the countryside and the cities and pushing more residents to migrate.”
Japan’s real estate bubble burst as easy credit and speculation drove property prices to unsustainable levels which burst and led to the deep recession of 1992-93. China’s current real estate woes point to overbuilding rather than astronomical prices. China’s problem may not be too easy credit but adapting too slowly to its changing demographics and building the wrong kind of real estate. As the population ages and has fewer children, two bedroom family apartments and three airports for every town may not be what is needed.
China’s property surplus has led to falling property prices rather than a bubble. Its problem is deflation, not a bubble. China’s economy is dominated by real estate which accounts for between 25% and 30% of GDP depending on what you include. China’s government has tried various ruses and schemes to support real estate (see our monthlies and Macro Macchiatos, passim) but the real estate market and its supporting steel industry are struggling to grow in 2023. The effect on bulk carrier, tanker and container shipping markes has been apparent. Just one example - here's a chart of quarterly average USD per day hire rates for the Capesize, Panamax, Supramax and Handysize voyage groups used by the Baltic Exchange:
As you can see, it looks very like the cycle which began in the first quarter of 2020 peaked in Q3 of 2021 and has been trending downwards ever since. It has been our forecast for over a year that the current bulk carrier cycle would end this year and a new cycle would begin in 2024, one in which constrined tonnage supply would have greater influence than weak demand growth caused by a slow-down in Chinese industrialisation and urbanisation trends.
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