1 Negative impacts of China’s demographic crisis trickle out
Feb. 15
The State Council Information Office held a press conference to share the results of the first national comprehensive risk census of natural disasters.
Zheng Guoguang, secretary-general of the Natural Disaster Reduction Commission and director of the office of the leading group of the State Council’s first national comprehensive risk census of natural disasters, said that the purpose of the census was to gather information on various disaster-causing factors, disaster-affected bodies, data on disaster reduction capabilities, data of annual disaster since 1978 and major disasters since 1949, and data on key disaster hazards.
Zheng added that nearly 5 million professional and technical personnel were mobilized over the past three years to complete the census. Also, the housing and urban-rural construction industry had collected data on nearly 600 million urban and rural housing buildings and more than 800,000 municipal facilities nationwide. On Feb. 23, the phrase “official disclosed that there are 600 million houses in the country” became a top search topic and sparked heated debate on the Chinese internet.
According to mainland media reports, a census by the PRC’s housing construction system involved 660 million urban and rural housing buildings across the country. Rural houses accounted for more than 90 percent of those buildings and half of the total building area. Meanwhile, there are over 47 million urban buildings (residential and non-residential).
Feb. 23
An article by mainland magazine China Newsweek, “The First Wave of Kindergarten Closures Have Arrived, Kindergartens Say ‘It’s Hard to Find Even One Child’” (首輪關停潮已來，幼兒園“一孩難求”), became a trending topic on Weibo.
The article noted that the number of newborns in China had been declining by 1 to 2 million each year since 2017, resulting in a shortage of enrollments in kindergartens. An investigation by reporters in Beijing found that most private kindergartens and a small number of public kindergartens had a surplus of places from 2021 and 2022. This is compared with some years back when public kindergartens barely had any places.
Mainland media Yicai also reported that a kindergarten run by a central-owned enterprise in Wuhan that only accepted the children of employees from the enterprise had some classes without full enrollment since the autumn of 2022. This is compared with queues for enrollment during the early years of the two-child policy in the PRC (2016 to 2021). The kindergarten has since opened up its places for the children of parents who do not belong to the central-owned enterprise.
Feb. 28
The PRC National Bureau of Statistics issued its statistical bulletin on national and social development (2022年國民經濟和社會發展統計公報) for 2022. The bulletin showed that there were 733.51 million people employed nationwide at the end of 2022.
Of the total, 459.31 million people (62.6 percent) were employed in urban areas, a drop of 8.4 million from a year ago and the first decline since 1962.
Big picture
The CCP is trying to revive a rapidly deteriorating Chinese economy that was further worsened by three years of “zero-COVID,” save the real estate sector, and turn around China’s population decline.
Our take
1. Population growth is an important economic growth driver. This is even more so for the PRC where property sales and manufacturing are key pillars of economic growth.
Under Xi Jinping, the CCP authorities have moved relatively quickly to abandon the “one-child” policy that had been in place since the time of Deng Xiaoping and introduce a slew of pro-natalist measures. Those measures, however, have thus far proved to be ineffective in reversing the trend of birth declines. Three disastrous years of “zero-COVID” also compounded China’s fertility problems. In 2022, China recorded 6.77 births per thousand people, lower than the 7.52 per thousand in 2021 and 8.52 in 2020; the birth rate was still above 10 per thousand people in 2019.
2. The phenomenon of kindergarten vacancies is an early sign of China’s demographic crisis becoming more obvious. Enrollment woes at kindergartens today will impact the education sector in a couple of years. Two decades later, China could start to see serious labor shortages in the manufacturing sector and waves of business closures. Meanwhile, property developers will see chronic oversupply problems, struggle even more to pay off debts, and fold in greater numbers as the real estate industry comes to terms with population decline.
China already appears to have a severe property oversupply problem at present. People were searching “official disclosed that there are 600 million buildings in the country” after the release of the national comprehensive risk census of natural disasters because they feared that the value of their real estate would collapse given the supply glut.
To get a rough idea of how bad the property oversupply problem is, we look at the figure of 47 million urban buildings given by the census by the PRC’s housing construction system. Assuming 60 percent of those urban houses are residential buildings and each building has 20 households on average, those buildings are estimated to hold 564 million apartments. Officially, there were 2.62 people per household (apartment) on average in 2020. That means that China’s available urban housing can accommodate 1.478 billion people, or a figure far exceeding the number of permanent urban residents (including migrant workers) in China in 2022 (920.71 million people).
The oversupply problem becomes starker when considering that fewer people have been able to afford property in recent years. A 2019 survey by the China Institute of Income Distribution of Beijing Normal University found that only 72 million people in China have a monthly income of over 5,000 yuan. Of those 72 million, 73.13 percent, or less than 53 million people, live in urban areas.
3. As China’s demographic crisis worsens with each passing year, local governments will encounter even more fiscal shortfalls and see their debt crisis triggered as they have fewer people and businesses to tax and property developers cut down on land purchases. With less money, local governments will struggle to sustain grassroots operations and properly “maintain stability” in society. This means that the CCP’s ability to govern China and keep the population under strict control will weaken during a period where social anger and tensions can be expected to rise sharply as economic conditions deteriorate. As the CCP’s political legitimacy erodes, regime collapse becomes a matter of when, not if.
Unless Beijing finds a way to make scientific and technological breakthroughs under increasingly trying conditions over the next decade, the PRC will very unlikely achieve its goals of “basically realizing socialist modernization” by 2035 and become a “modernized power” by 2050 as set by Xi Jinping at the 19th Party Congress given China’s demographic problems. The CCP will find it extremely difficult to realize its ambition of supplanting the U.S. as the global hegemon, and its ability to invade Taiwan will diminish.
2 CCP attempt to address pension fund shortfalls begins to backfire
Feb. 11
Central-owned CITIC Securities issued a report stating that the PRC government is expected to gradually delay retirement this year, according to mainland media. The report said that the average retirement age for men and women will be pushed back to 65 by 2055.
The CITIC report ignited widespread discussion online, with many expressing concern and opposition to the retirement delay plan. CITIC Securities staff later denied the existence of such a report.
Feb. 19
Mainland news portal NetEase published an article about a recent “insurance termination wave” (退保潮) in China. (Note: “Insurance” here refers to health insurance, pension insurance, unemployment insurance, maternity insurance, and work-related injuries insurance).
The article quoted a person working at the social security bureau as saying that many people are terminating their social insurance plans because they believe that it is not worth it to delay retirement, have low income and few savings, and cannot afford to keep making contributions.
Meanwhile, a video circulating on social media noted: “Many of the people who have lined up to terminate their social insurance recently are basically flexible workers. The social security staff earnestly explained to them that it was not worth it to surrender their insurance now, but it was for naught. These people are determined to terminate their scheme, even if they will only be refunded the personal portion of it. Their reasons are basically the same, that is, they can’t afford to make contributions.” (Note: “Flexible workers” are those with non-standard employment relationships and receive flexible remuneration.)
A review of various mainland media reports on the “insurance termination wave” subject yields the following reasons for the trend:
- People are worried that the minimum number of years to make insurance contributions will be extended again, from 15 years currently to 25 to 30 years.
- People cannot afford to pay social insurance premiums, which keep going up each year.
- According to the calculations of some flexible workers, they will have a total of 300,000 yuan in their social insurance account in 20 years if they pay 1,492 yuan in contributions each month. When they reach the delayed retirement age of 65 and start drawing a monthly pension of 2,000 yuan from their account, they will only be able to “recoup their investment” (回本) so to speak when they are 80. Yet the average life expectancy in China is 77.
- People are dissatisfied with the high level of benefits enjoyed by senior CCP officials and civil servants.
Feb. 25
Zhou Xiaochun, the former governor of the People’s Bank of China, aired his views and suggestions on the PRC’s pension system at the 5th Global Wealth Management Forum hosted by Caijing Magazine.
Zhou said that he does not believe that there can be further delays in dealing with the pension issue because it will be harder to make choices later. He added that the task and challenges of pension research are enormous, particularly because China has a large population and the most prominent aging trend in the world. Zhou further said that the pension gap will grow even bigger as China transitions to an aged society.
Zhou also said that the state pension pool in China is several trillion yuan, or less than 10 percent of the GDP. This is below the 50 to 100 percent of the GDP in most countries, he added.
Background
Retirement age
1. The current retirement age in China is 60 for men, 55 for female cadres, and 50 for female workers.
2. Shen Shuguang, vice president of the China Association of Social Security and director of the Social Security Research Center of Sun Yat-sen University, noted in a Global Times article on Feb. 10 that delaying retirement is the “general trend” as populations age further and the socio-economic situation changes.
China social security
China’s social security fund balance in 2022 was 7.4 trillion yuan, according to official data. Also, there are 1.368 billion social security card holders nationwide, or 96.8 percent of the population.
According to a survey of flexible employment for the third quarter of 2022 by Beijing Tengjing Big Data Applied Technology Research Institute and Ant Group, only 13 percent of flexible employees made contributions to the so-called “five insurances and one fund” (五險一金, or social security and housing provident fund). Official data records about 200 million people in flexible employment in China.
Backdrop
Retirees in several parts of China launched the “white-haired revolution” to protest cuts in their health insurance benefits (see here and here).
Our take
1. The information above is another sign of China’s demographic crisis becoming more obvious.
2. The CCP appears to be in the midst of rolling out reforms (cutting health benefits, delaying retirement age, etc.) to cope with expected fund shortages as more and more people hit retirement age. While such measures are prudent from the financial perspective, they also hurt the interests of many people in China seemingly all at once during a period when the CCP’s political legitimacy is already eroding quickly due to various crises and policy failures.
As public anger grows and social instability breaks down, the CCP could find itself facing more and more “revolutions” over various issues at the grassroots.
3. The emergence of the “insurance termination wave” is a reflection of China’s worsening economy. People are finding it harder to pay social security premiums as their incomes shrink, and would rather hold on to all of what little they make rather than set aside a portion of it for a retirement that could never come (assuming the CCP keeps delaying the retirement age).
The “insurance termination wave” will worsen China’s pension fund shortage problem if the trend gains momentum. Ironically, the CCP would have achieved the exact opposite by planning to delay the retirement age, and chalk up another policy failure of sorts.
Meanwhile, the Chinese people can be expected to make more precautionary savings and cut down on consumption as the economic situation deteriorates. The lack of demand will in turn stymie the CCP’s efforts to revive the economy.
3 Slumping Hong Kong trade in January and empty containers in ports bodes ill for the mainland
Feb. 14
Mainland media Caixin reported that empty containers are piling up in major ports and storage yards outside ports as global trade cools.
Caixin cited data from container logistics outline platform Container xChange as showing that the Container Available Index (CAx; quantifying container availability at major ports worldwide) for 40-foot containers at the Port of Shanghai was as high as 0.64 for the sixth week of 2023 (Feb. 5 to Feb. 11), and the index had been above 0.6 for 11 consecutive weeks. Per Container xChange’s definition, a CAx rating of over 0.5 indicates that a port has surplus containers, while ratings of below 0.5 reflects insufficient containers.
Feb. 20
The South China Morning Post reported that containers are “gathering dust” and occupying “ever available space around the port” at the Yantian International Container Terminal in Shenzhen. A truck driver told the Post that while the port has more than 15,000 registered truck drivers, only around 2,000 of them now have work.
“There is no business,” the manager of a container yard near the Yantian port told the Post. “Some yards have closed their business.”
The Post also noted that the port authorities had issued a statement in November 2022 saying that the volume of empty containers stored there had hit the highest level since March 2020, and would soon reach the highest level since the port opened 29 years ago.
Feb. 26
Hong Kong’s Census and Statistics Department released data showing that the value of the territory’s overall trade had fallen for seven consecutive months in January 2023, or a decline that exceeded expectations. Hong Kong’s trade amount in January was also the lowest in the past three years of the pandemic.
- The value of exports fell 36.7 percent year-on-year to HK$290.0 billion, the largest drop since September 1953 (negative 39.3 percent) and greater than the market expectation of a 27.6 percent decline.
- The value of imports fell 30.2 percent year-on-year to 316.3 billion yuan, or worse than the expected drop of 23.1 percent. The decline was worse than in December 2022 (negative 23.5 percent) and the largest since September 1967 (negative 36.6 percent).
- The trade deficit for the month was HK$25.4 billion, or the equivalent of 8 percent of the value of merchandise imports.
- Hong Kong’s exports to mainland China in the month fell by 43.7 percent and imports fell by 39.1 percent.
- Hong Hong’s exports to Asia dropped by 41.4 percent year-on-year in January.
- Hong Kong’s exports to Germany, the United States, and the United Kingdom fell by 40.0 percent, 28.8 percent, and 27.0 percent respectively.
- The category of goods that saw the largest import and export decline in January was “electrical machinery, instruments and appliances, and parts.” The import of those goods fell by 30.8 percent (down HK$60.2 billion) and exports fell by 37.7 percent (down HK$78.7 billion).
Feb. 27
Radio Free Asia reported that the Container Availability Index was 0.65 for 20-foot dry storage containers in the port of Shanghai in the week beginning Feb. 27. Shanghai’s export container shipping price index stood at $946.68 on Feb. 24 after a 14-month drop, the lowest level since 2015.
A person in the shipping industry told RFA, “China’s three years of zero-COVID has been a disaster for the shipping industry, which is now running at massive losses. Daily running costs for a 10,000-ton vessel are about $5,000.”
The person added that business and economic confidence had been severely harmed by the Shanghai lockdown in 2022. “For example, the production of steel billets has now been relocated to Vietnam and Indonesia, where new factories have been built. Most of the businesses relocating are owned by domestic capital — it’s local Chinese businesses that are relocating their manufacturing facilities,” he said.
March 1
1. China’s official manufacturing purchasing managers’ index (PMI) for February was 52.6, up from 50.1 in January and the second consecutive month in the expansion zone. The PMI showed a rise in the “New Export Orders Index” to 52.4, or the first expansion after 21 consecutive months of contraction.
2. The Caixin China manufacturing PMI was 51.6, an increase of 2.4 percentage points from January. This was the first time that the Caixin PMI went over the contraction threshold since August 2022 and was at the highest point since July 2022.
Our take
The PRC’s official figures seem to indicate that China’s economy is picking up after three years of “zero-COVID.” However, the stacks of empty containers sitting in Chinese ports, as well as the sharp drop in Hong Kong’s trade in January, suggest that China’s trade outlook is still gloomy.
1. We see two likely reasons for the pile up of empty containers in Chinese ports.
First, global demand is falling amid an economic downturn and there are fewer orders now than before the pandemic. As a result, the shortage of containers during the pandemic has now become a surplus. The South China Morning Post noted that the price of a 40-foot container in December 2022 was 45 percent lower in February when compared to the same period in 2021, citing a report by maritime research consultancy Drewry. The report also estimated that container prices would keep declining for the first six to nine months of 2023 before recovering.
Meanwhile, the Freightos Baltic Index showed that the rate for shipping a 40-foot container from Asia to the U.S. west coast was $1,295 in the middle of February, or 92 percent lower than the same time in 2022. The index also showed the rate from Asia to the U.S. east coast falling by 86 percent and the rate for Asia to northern Europe dropping by 80 percent. All of the above indicates that the container surplus will persist in the near future, which spells trouble for China’s exports and economic recovery.
Second, U.S. economic decoupling from China and the intensifying “tech war” is hurting PRC exports. Data released by the U.S. Department of Commerce on Feb. 7 showed that U.S. imports from China reached $537 billion in 2022 compared with $505 billion in 2021, but was lower than the $553 billion imported from Europe last year. Orders that used to be handled by China are also shifting to Southeast Asia and India. For example, Bloomberg News reported that Apple AirPods maker GoerTek is investing an initial $280 million in a new Vietnam plant and is considering an expansion in India. Nine out of 10 of Apple’s most important suppliers may be getting ready to make large-scale moves to India and elsewhere, according to Bloomberg. Meanwhile, Sony Group moved most of its camera production for Japan, Europe and the U.S. out from China to Thailand by the end of 2022, according to Nikkei Asia.
Another sign of declining exports and orders in China is the unusual labor surplus after the Lunar New Year period. Chinese companies appear to be recruiting fewer workers and wages are getting lower. According to Radio Free Asia, migrant workers in the manufacturing hub of Dongguan in Guangdong Province reported being paid just 9 yuan an hour for temporary workers, or far below the minimum hourly wage as stipulated by the authorities at over 20 yuan. The workers said that the wage situation was linked with the serious shortage of orders received by companies.
2. Hong Kong’s poor trade figures in January are another sign that China is seeing greatly reduced exports and orders. This is so as China has long re-exported and settled mainland goods through Hong Kong. The PRC is also known to re-export goods to Southeast Asia and other nearby regions through Hong Kong to bypass foreign sanctions.
According to Hong Kong Census and Statistics Department data, Hong Kong’s total trade with mainland China accounted for about 50 percent of the territory’s total trade over the past decade. In 2022, Hong Kong’s imports from the mainland accounted for 42.2 percent of its total imports, while exports were 56.7 percent of the whole. And of Hong Kong’s total trade, “electrical machinery, instruments and appliances, and parts” is the category of goods that makes up the largest portion of the total, coming in at 45.7 percent and 49 percent of imports and exports respectively in 2022. Separately, mechanical and electrical goods comprise nearly 60 percent of mainland China’s export value.
The decline in exports from Hong Kong to Germany, the U.S., and the UK in January indicates that the demand for PRC re-exports is dropping along with the demand for Chinese goods in general.
3. The PRC’s official China PMI in February suggests that the manufacturing sector is recovering somewhat after the lifting of one “zero-COVID” restriction after the other from December 2022 onwards. As with most official CCP data, however, it is unclear how much of the February PMI figure reflects actual recovery and how much is merely “padding” by CCP statisticians to generate a “feel-good” atmosphere about the Chinese economy leading into the opening of the Two Sessions in early March.
Escalating “great power competition” between the U.S. and the PRC bodes ill for China’s export situation.
For one, Rep. Mike Gallagher (R, Wis.), chairman of the House Select Committee on the Chinese Communist Party, has indicated that the committee plans to come up with a blueprint for selectively decoupling the U.S. from China over the course of its two-year term.
In the near term, the Biden administration is reportedly considering the restriction of U.S. investments in certain high-tech sectors of the Chinese economy. The Wall Street Journal also reported on Feb. 28 that the administration is weighing the revoking of export licenses issued to U.S. suppliers for sales to Huawei. A former senior official familiar with the Biden administration’s policy deliberations told the Journal, “The policy that had allowed exports to Huawei, notwithstanding the entity listing, is being wound down. The White House is now telling Commerce, ‘Cut off the 4G sales, the time has come to do more pain to Huawei, to try to finish their demise.’”
What’s next
China’s trade data for the first quarter of 2023 could fall short of market expectations and look very ugly. Businesses, investors, and governments may have to look beyond official data and short-term factors, as well as consider the PRC’s geopolitical risks and the CCP’s political vulnerabilities, in reassessing China’s ability to recover economically over the near and long-term.
