The Hard Long Slog

The long-running debate as to whether China will dethrone the U.S. as the world’s top superpower or buckle like Japan or the Soviet Union is heating up again. Slowing growth and a slew of ominous data has people talking about just how serious this crunch will turn out. You can check out two great discussions about this at ChinaFile and New York Times (or to simplify, just read the opposing viewpoints of Michael Pettis and Justin Lin).

Whether there will be a crash and what that says about China’s economic model is certainly very significant, but I think when looking at the big picture of China’s future, it’s hardly THE most significant issue. I don’t fear a Chinese hard landing nearly as much as I fear the hard long slog unfolding much more quietly.

Right now China is barrelling down the economic rapids trying to avoid crashing, but there’s already a hole in the bottom of the raft. Even if it avoids a crash, there are much worse things in store. And China doesn’t have just one big hole in its raft, it has (at least) four.

1.  The Aging Population
In 2010, about 13 percent of China’s population was over 60-years-old. Or in other words, there were five working age people for every retiree, and even that’s already causing problems. With China’s enormous “floating population” of migrant workers, about half of all elderly live by themselves or with just an elderly spouse. This leaves many migrants the choice of essentially straddling their hometown and work-destination in order to care for ailing parents, or paying to put them up in the city. Both options can cause huge financial strains, which is made worse by the fact that the one-child policy has left plenty of couples to solely support four parents. But as tough as it is now, we ain’t seen nothing yet:

That 5-to-1 ratio of workers-to-retirees will fall to 3-to-1 just by 2020 and continue to get worse from there until the over 60 crowd goes above and beyond a third of China’s population. Some may point out that this is very similar to what Japan and several other countries are going through, but there’s one very important thing to keep in mind:

 

Thanks to the one child policy wreaking havoc on demographics, China is facing a first world problem while it still only has third world resources to cope with it. Japan may be able to afford it, but in all likelihood, China won’t. The facilities and the trained personnel to care for these elderly just aren’t there, and putting them there will be incredibly difficult with the meager means China has at its disposal. It will put unmanageable strains on families, pensions and China’s healthcare system…not to mention the economic dividends China’s large population of workers have been supplying over the past two decades.

2.  The Pollution
I don’t even know where to begin on China’s pollution problems. For starters, an estimated 750,000 Chinese die prematurely each year from air pollution-related respiratory diseases. Hundreds of “cancer villages” dot the countryside. And the country’s carbon emissions, which are already the highest in the world, aren’t expected to peak for at least another two decades.

But the most frightening implication of China’s pollution is what it’s doing to the food and water supply. Wall Street Journal reported last week that “anywhere between 8% and 20% of China’s arable land, some 25 to 60 million acres, may now be contaminated with heavy metals. A loss of even 5% could be disastrous, taking China below the ‘red line’ of 296 million acres of arable land that are currently needed, according to the government, to feed the country’s 1.35 billion people.”

Many farmers that used to produce healthy food are now growing food they know can’t be sold just so they can qualify for compensation from the government or polluting factories. Or worse, they’re growing food they know isn’t safe to sell, but they’re sellling it anyways. On top of this, desertification resulting from global warming and deforestation is claiming arable land the size of Rhode Island every year.

After decades of growth policies that used the “grow GDP first and clean up later” principle, China is realizing that it all may be too expensive to clean up. A researcher from the Chinese Academy of Social Sciences has estimated that if you factor in environmental costs, China’s real annual GDP growth would be nearly halved. However, no matter how much money is thrown at the problem, there are some resources that may never be recovered…which leads to the next big problem.

3.  The Water Shortage
Demand for water in China is skyrocketing, while at the same time supply is dwindling and being contaminated.  The Tibetan glaciers, which supply the water for all three of China’s major rivers – The Yangtze, Mekong and Yellow – are disappearing by as much as 7% per year. About half of the rivers that existed in China in 1990 have already dried up, and of those rivers and lakes that remain, about 75% are severely polluted. 28% are so polluted that their water can’t even be used for agriculture.

The water shortage will also have severe effects on industry. As much as 17 percent of China’s water is now used by the coal industry and other power stations. And as you can see, China’s coal use has been shooting upward for the past decade with no promise of slowing any time soon.

 
Chart via U.S. Energy Information Administration

Over the next two decades, this water crisis is poised to come to a head with demand far outstripping supply by nearly 200 billion cubic meters. What this will mean for China’s economy and the everyday lives of its citizens is scary to think about, to put it mildly.

 
Chart via Business Insider and China Water Risk

4. The Gender Imbalance
The one-child policy, a patriarchal culture and sex selective abortions and have come together in what will eventually create a population of surplus men that rivals the overall populations of many large countries. According to a Chinese population researcher from Xi’an Jiaotong University, the number of these “bare branches” aged 20 to 49 in China will reach 20 million by 2015 and continue to grow to around 44 million by 2040. At current birthrates, eventually one in five Chinese men will be hopelessly single. These numbers are unprecedented in human history, and experts are expecting very little good to come from it.

Times and places in history with large male surpluses – from the American Wild West to mid-19^th century Northern China – have been marked by lawlessness and exploitation of women. Rises in violent crime rates have been attributed to the imbalance that already exists in contemporary China. And since those left without wives tend to be the very poorest men – who are increasingly finding themselves clustered in “bachelor villages” – other grievances could easily consolidate them into a violent force. This is exactly what scholars Valerie Hudson and Andrea Den Boer have argued preceded historical Chinese conflicts like the Nien Rebellion, the Black Flag Army, the Boxers and the Eight Trigrams Rebellion.

Furthermore, if the Chinese government gets worried about the social upheaval bare branches could cause, they may try to channel that angst into the Chinese army. In that case, it could result in ultra-nationalism and a foreign policy that’s “swaggering, belligerent, provocative,” as Hudson and Den Boer put it.

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I try to be an optimist. I have confidence that new technologies and targeted policies can mitigate some of these problems before they become catastrophic. But the fact that these four things are happening in concert is downright terrifying and presents the probable scenario that they’ll exacerbate one-another. The worsening health effects from pollution could make it more expensive to care for the elderly. The water shortage and soil degradation could cause food and utility prices to rise, making it harder to eke out a living and keep the bare branches content. You get the idea.

So by all means keep an eye on the present economic hurdle. It will certainly have enormous implications on the quality of life in China and the extent to which the country is able to address other issues. But don’t forget that even if China gets over this hurdle, there are much bigger ones on the road ahead. Keep a very close eye on these hurdles, because they won’t become apparent in any abrupt crash. But they have the potential to be much more crippling to the country’s sustained growth.