China’s Demographic Timebomb | The Acquirer's Multiple®

During their latest episode of the VALUE: After Hours Podcast, Carlisle, Taylor, and Bloomstran discussed China’s Demographic Timebomb. Here’s an excerpt from the episode:

Tobias: But you’re pretty bearish on China. What do you think about China? I know you just mentioned Alibaba. But generally, just don’t invest in communist regime. It’s not the VIE or whatever they call it, that structure where– I don’t know what the rights are. It’s [crosstalk] equity.

Christopher: It’s a VIE. Alibaba, if you own Alibaba, you don’t own equity in a business. You own a certificate in the Cayman Islands. And communists at a point tend to just take all the money away and you’ll never get it out. I’m fairly confident that most of these Western businesses are stuck in China. And at a point, who knows whether it’s when China actually does wade across and try to take over Taiwan. Who knows what the end game is? I’ve got a section in the letter on China. I always try touch on two or three themes beyond Berkshire and beyond the Semper portfolio.

I’ve got a section on China. I am very bearish. You’ve got a country that in the last 40 years, but really in the last 20 years, grew to the second largest economy in the world, $18 trillion. They brought half their population off the farms into the cities. There was a growth miracle component. They never did it with a profit motive. The Shanghai Exchange is negative for the last couple of decades. The businesses don’t earn a return on capital, but that’s not been the mission. The mission from a party standpoint was we’re going to grow and we’re going to bring people off the farms, and they did that. And really, the one child policy was disaster. But anytime a nation industrializes, families stop having as many kids, because you don’t need a lot of bodies on the farm, free labor. So, you go from seven to five to four kids. China’s now got a birth rate of 1.2. You need 2.1 to sustain a population.

The other thing that happens though, as the birth rate declines, when a nation industrializes, is the current population lives longer, access to medicine and healthier living. City living is not as hard on the body as living in farms. And so, you get this big expansion of the older portion of the population. So, China is so top heavy now with 1.4 billion people that there’s no way to reverse that gruesome one child policy, which you’ve now got so far fewer women, because families would abort the girls because you wanted the son as the heir. There’s no way to undo decades of a failed policy. And so, the Chinese population is going to shrink by half over some period of the next 30 years to 70 years. You look at what they’ve done to grow and the leverage that they’ve used in the last two decades.

We have a huge debt problem in the West and in all of industrial world. We’re 350% credit market debt to GDP in the United States, and the same holds for Europe. China is way above that. They’re an $18 trillion economy with something like $55 trillion or $60 trillion in debt. You’ve got Evergrande that’s blown up and Country Garden. Evergrande had over $300 billion in liabilities, and they liquidated a couple of weeks ago, and there’s nothing. There’s nothing. Every property developer is done, you’ve got something like $13 billion of hidden off balance sheet debt that exists at the province and the municipality level that is not counted in the official Chinese debt numbers, all of that money got lent to property developers. And then in turn, the wealthy Chinese who got rich as the early age of industrialization, they’ve invested in that stuff. And so, there’s no capital left.

You combine these huge overbuilding of infrastructure with a population that’s now been shrinking since 2021, and as I said, is going to get cut in half. It’s a really bad way to grow your GDP per capita by cutting your population in half. But that’s [Jake laughs] essentially what’s going to wind up happening over the next few decades. Overlay that demographic problem with no need to build more buildings, and they’re going to complain. What’s really odd is they will finish all the projects under construction. Even though every single property developer in the country is bankrupt, they’ll finish that stuff and then they’ll blow it up. But you’re not going to put more people into the cities. In fact, people in the cities are probably going back to the farms as the population shrinks. There’s no more opportunity.

So, the largest importer of every base commodity in the world, Toby, the iron ore from Australia and Brazil, it’ll still come in, and it’s coming in now, but less and less of it will get used domestically. Right now, they’re dumping everything on the world, Olin, in the case of the caustic and chlorine world, they’re dumping epoxy resin on the world at prices that make no sense at whatever point the West sanctions that. But there’s no economic use to it. They’re losing– China has among the highest electricity costs in the world. It makes no sense to do it. But that will all come in reverse. And that’ll bear on global growth, which is already slower for the last two decades because we’ve put too much debt into the system. So, I’m very bearish on China. No, I would never invest in a place where you don’t have rule of law.

I think Starbucks at some level with their 7,000 stores out of a 38,000 or 39,000 base. China is a big component of the growth curve for Starbucks. They’re company owned stores like they are in Japan, not in Korea. They intend to open a lot of stores. If China really gets sideways with the West– And again, Taiwan will have a lot to do with it. But international trade will have a lot to do with it. Their debt problems will have a lot to do with it.

There’s a not insignificant chance that Starbucks is just a single example loses their assets in China and they’re commandeered by the state. That enters our thinking and observing this for a number of years. I had a series of predictions in my 2000 letter and then the follow up, my 2014 letter, said, China’s GDP would not pass that of the US in 15 years. Now, they won’t do it in the next 70 years, because you’re not going to do it with a population that gets cut in half. We have net growth in population of the US. And a lot of embedded advantages to how we’re situated with agriculture and friendly neighbors to our north and south, and two big oceans on the left and right side of the country. Most powerful military in the world.

Jake: That big of a waterways?

Christopher: All of it. China is not going to pass the US in terms of GDP, despite their having $1.4 billion, our $340 billion. It’s not going to happen. They’ve already done it. The miracle has run its course, and that’ll reverberate in a lot of places. And if you’re an investor, a PM or analyst, you better be thinking about how the rollover in China– Demographics take forever. This is not a quarterly or a yearly thing. It’s going to happen over a long period of time, but there will be second and third and fourth order effects that are going to bear on how capital is treated globally. I think China is as big of a risk as the debt bubble that we all sit underneath in the industrial world, and you better pay attention to it. At least that’s my take.

Jake: Scary. [laughs]

Christopher: It requires a little kombucha.

Jake: Yeah, it does.

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