China's Massive Economic Advantage Over The World Is About To Disappear

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Workers making metal parts at a factory of the Changzhou Wujin Zhengda Vehicle Industry Co. Ltd in Changzhou, China, on July 9.

We have finally arrived at a point in history that economists have been dreading for years: the moment when the number of Chinese workers goes into decline for the first time in decades.

Since way before the 1990s, China has had one huge economic advantage over the rest of the world. Year after year, the number of people of working age increased.

Economic growth is closely tied to the growth in a country's working population. Simply put, the more people you have working, the more wealth and wages you are likely to create. You can get these extra workers two ways: By making more babies or by letting immigrants come live with you.

For over four decades, China's industrial revolution has been pulling in new workers year after year. But that demographic wave is coming to an end, and now the total size of the workforce is about to go into decline, as this chart from Morgan Stanley chief Asia economist Chetan Ahya shows:

This will be disastrous for China's economy. Suddenly the country will have an increasing population of older people who don't work and must be supported by a decreasing population of people who do work.

You can see the problem in this chart of China's population in 2010 broken down by age. Right now that big bulge is in the years in which people are their most productive at work. Those occupying that bulge are about to retire and stop producing, and the only workers available to support them are the children in that narrow "neck" area at the bottom of the chart:

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The population time bomb could not have come at a worse time, because demand for China's exports has collapsed:

In an attempt to get more growth out of declining fundamentals, China has been investing more and more in its businesses and government enterprises. But the more it invests, the more marginal the returns have been, as these two charts from Morgan Stanley show:

As demand collapses, there has been deflation in the producer price index (PPI inflation is a bit like regular consumer price inflation, except it's for business products and services). Unfortunately for China, all of this has occurred at a time when the country has just taken on a ton of debt, as these two charts show:

As we explained earlier, China's debt situation is about the same size as Greece's debt situation. China is more capable of dealing with that debt than Greece is. But it is still a massive overhang on an economy that that is slowing down now and — because of the population issue — about to slow down even more.

The scary part for other countries is that China's economy is so huge it functions as both an engine and a supply source for the economy of the rest of the world.

These charts indicate that engine just went into reverse.

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http://uk.businessinsider.com/chinas-four-decade-miracle-ends-this-year-2015-8#ixzz3iUQkxh79