YouTube’s favorite geopolitical analyst Peter Zeihan’s has recently made huge waves with his wild prediction that
we are looking at the end of China as a political entity within a decade or two and as an end and an economic entity within a decade
But, is this prediction a bout China’s immanent collapse based on solid arguments? Or is it just sensationalist nonsense meant to get views?
To find out, I’ve spent the last weeks diving deep into the data and logic supporting Mr. Zeihan’s arguments and comparing them to arguments and evidence put forward by other experts.
And, first of all, I have to give Mr. Zeihan credit because his main arguments for this bold prediction are based on four big problems with the Chinese economy, that are absolutely real, namely:
- that China is getting old so fast that it will lose a significant share of its population in the upcoming decades
- that the country relies heavily on importing the most crucial goods for any economy, food & energy.
- that its debt-fueled investment led-growth model is quickly running out of steam, as its gigantic housing bubble pops.
- that the country is increasingly authoritarian, which means that its leader is getting more isolated and therefore, potentially will not able to respond to these problems.
But, are these problems really so bad that they will lead to the collapse of the Chinese economy in the next decade? Or is Mr. Zeihan making them look worse than they are to support his narrative?
After all, Mr. Zeihan has been predicting that China’s economy will collapse in the next decade, already since 2010, which so far it has not happened.
Well, after taking a closer look at his arguments, I came to the conclusion that most of these problems are either not as bad as they seem or will likely not lead to a collapse due to the unique structure of the Chinese economy.
So, let’s dive into each of these arguments now, starting with Mr. Zeihan main argument about:
1 China’s Demographic Collapse
The core of this argument is that, as Zeihan writes in the U.S. financial newspaper Barron’s,:
China’s labor force & population have already peaked in the 2010s, and China’s population will be half by 2050.
And, this is a problem for two reasons.
First, it is a problem on the demand side because
most of the consumption of a modern system happens when you’re in your 20s and your 30s when you’re buying cars and raising kids and Building Homes
and, second, it is a problem on the supply side because
without young people we’ve seen their labor costs increase by a factor of 14 since the year 2000 so Mexican labor is now one-third the cost of Chinese labor
despite a trillion dollars of investment in a bottomless supply of intellectual property theft they really haven’t Advanced technologically in the last 15 years
it’s obvious that this system is breaking down the demographic collapse is not correctable there are not enough people under age 40 for them to even try
So, okay, just to recap, an irreversible demographic collapse will decimate Chinese consumers, and increase labor costs, which will decimate Chinese competitiveness as they will be outcompeted by countries like Mexico.
Now, immediately, what Mr. Zeihan said about most consumption being done by people in their 20s and 30s, really didn’t sound right to me and indeed when I looked into it, I found that, in modern systems, no, most consumption is actually done by those over 35 years old, simply because they earn more money. For example, as you can see here in this graph for the United States, it is true that the young typically spend more than they earn, given that the light blue bar is bigger than the dark blue bar. However, this doe s not mean that they consume more, as the light blue bars, which represent total expenditures are still bigger for older age groups, simply because their income is higher. So, even if there are fewer young people in China this will not decimate consumption immediately.
Similarly, I was very skeptical of Mr. Zeihan’s claims that China did not advance technologically in the last fifteen years, given that I know that in these years they have come to dominate various advanced industries such as telecommunications, electric vehicles, drones, phones, and solar panels. And, indeed when I checked by looking at Harvard’s economic complexity database, which ran ks economies based on how advanced their exports are, China clearly moved up the value chain quite a lot in the last 15 years, even surpassing Mexico a few years ago.
So, the fact that Chinese labor costs are now higher than those in Mexico will not necessarily kill its industries, just as Jap an’s wages being higher than those in China, does not mean that Japan’s industry will perish.
But, okay, even though some of Mr. Zeihan’s arguments are clearly not true, most experts I found agreed that China’s demographic decline is still a really big problem and, as Zeihan often mentions, probably not correctable through immigration. And indeed, as you can see from the red line in this graph published by the Economist, China’s working age population has indeed already peaked and will likely fall rapidly.
However, that still doesn’t mean that China will collapse because, after taking a closer look, I found 3 more big problems with Zeihan’s analysis.
First of all, while there are many estimates about China’s population trajectory, Mr. Zeihan only talks about the most extreme population projection that he could find. Importantly, he does refer to legitimate research. However, he hardly ever mentions that there are other well-known studies, such as this one in the prestigious medical journal, the Lancet, which estimates that China’s population will halve by 2100 not 2050. Or, that the UN is even more optimistic, as it believes, China’s population will only shrink by 8% up to 2050.
Of course, Mr. Zeihan might be correct to pick the most pessimistic research. However, I think it is still important to keep in mind that this is what he does.
The second problem though is a bit more problematic. You see, while Zeihan is right that China’s population decline will probably not be offset by immigration, he fails to mention that there are other options. For example, legendary Financial Times’s economics commentator Martin Wolf has argued that the fall in China’s working age population for the next 10 years, represented by this blue bar, can actually be fully compensated by moving more people from China’s underdeveloped villages to the cities, which is the light blue bar here, and the rest of it can be made up by simply increasing the retirement age above 60, which is represented by the final blue bar over here.
And then, we haven’t even talked about the third big problem with Mr. Zeihan’s story and that is that historically, the connection between demographics and economic performance is really not that clear. After all, as you can see here, China’s population surged well before its economy took off.
What’s more, there are other countries, like for example Nigeria, that saw a huge population increase (see World Bank data), and not much of an economic increase. Similarly, there are countries like Bulgaria which lost almost 10% of its population last decade, but whose economy still grew quite a bit, as workers got more productive.
And, given that Chinese productivity really has not yet caught up to even a country like Poland, it’s really quite possible that China’s economy will keep growing as it’s population shrinks, just as Bulgaria did.
Still, while Zeihan might get some basic fact s wrong, and might overstate the damage that a population decline will have in the next 10 years, his assessment that China’s population decline is exceptionally fast and will be damaging is shared by most experts that I found, includin g those in the Chinese government, which has therefore relaxed its one-child policy and put in place other measures to encourage bigger families.
However, as Mr. Zeihan notes in his Barron’s piece this all might not matter, given that, unlike the US
“China imports the vast majority of its energy as well as the inputs used to grow its food.”
And that brings us to Zeihan’s second argument about China’s immanent demise which is that
2 China faces a Food & Energy disaster as the U.S. navy retreats
an argument that comes from Zeihan’s latest book: the end of the world is just the beginning, in which he predicts that, having secured energy independence, the USA is likely to stop policing the global oceans, which means that international trade will once again be vulnerable to piracy.
And China, well according to Zeihan China is
the most vulnerable country in the world right now. Based on the situation with Russia, they’re facing the potential loss of significant raw materials, especially food and energy. The Chinese ar e the world ‘s top importers of both. So, there’s no scenario where China emerges unscathed. The challenge for the rest of us is to determine how we can adjust without China as swiftly and seamlessly as possible, because their influence is diminishing, and it will continue to do so this decade for certain.
But, again, after a bit of digging, I found three big problems with this argument.
First, and most obviously, the fact that China should depend on the U.S. navy for protection from pirates is something I really couldn’t find any other experts being concerned about. Confusingly, Mr. Zeihan himself states in an interview that the U.S. navy is no longer ideal for protecting merchant ships, as it relies too much on aircraft carriers that can destr oy small nations like Iraq, and not enough on ships that can patrol the global oceans. Which was weird to me given that China’s navy has focused on smaller ships and has thereby has already overtaken the U.S. navy when it comes to the number of ships, as you can see in this graph here from the BBC.
But, okay, I did find that most experts still consider the U.S. Navy the more powerful one, so maybe in a conflict with the U.S., China still faces a crippling energy and food problem, right?
Well…. no. Sure, on the surface Mr. Zeihan is absolutely correct that China imports more food and energy than it exports, and that this has gotten worse over time. However, after digging a little bit deeper into why, I found that one of the main reason for this is likely that China simply got richer and, after a couple of food scandals at home, the Chinese started to develop a preference for imported foods. A second reason is that, as mr. Zeihan says, farmland is relatively scarce in China. For that reason, food is indeed more expensive to produce in China, which has allowed foreign farmers to outcompete Chinese ones.
But, that doesn’t mean that China will starve. After all, if China’s access to foreign food gets compromised, then Chinese farmers w ill once again become more competitive.
But, then, you might say, Joeri ahaaaa, farming takes a long time, the Chinese cannot restart farming quickly in case of an emergency. And, yes, that is probably why the Chinese government has been building up a large national stockpile of food. Precisely to weather the emergency that Mr. Zeihan predicts could cripple it.
So, yes, food security is a potential problem in China. But, in my opinion, it is really not that bad as Mr. Zeihan makes it out to be.
Which is very similar to what I found for energy. Yes, China is currently depends on foreign energy products, and gets lots of it from Russia. So, if Russia were to collapse, that would be a problem. But, it wouldn’t be catastrophic, the United States has sanctioned some of the biggest energy producers in the world, like Iran, and Venezuela, all of whom are now friends with China.
And, just as with food, the Chinese government has been stockpiling oil in case of an emergency and is working hard to become energy independent by investing massively, massively, into alternative energy sources such as coal, as well as solar and wind-power.
So, just as with food and the dependence of the U.S. navy, while Mr. Zeihan could of course be correct, I wasn’t really convinced by his arguments and the evidence that he presented.
Luckily, I was much more convinced by the evidence that Zeihan used to back up his next argument which is
3 China’s Failing Growth Model
and, more than that, I was actually really impressed by Zeihan’s simple explanation that
the Chinese follow a capital intensive investm ent model
All East Asians have, to some extent, followed a specific growth pattern. However, the issue with this approach is that over-reliance on it can distort the economy. By continually following this method, more capital, labor, and resources are absorbed, leading to diminishing returns. There’s a limit to how many roads and factories a country needs. For instance, Japan reached this saturation point in the 1980s. After experiencing rapid, stratospheric growth due to this model, their economy eventually stalled.
because that comparison with Japan is basically aligned with the story of China expert professor Michael Pettis, who is one the most influential analyst on this issue at the moment.
But, this also highlights the problem that I have with Zeihan’s story. Because unlike professor Pettis, Zeihan does not predict a Japan style stagnation, he predicts an economic collapse, because, unlike in Japan at the time
You’re talking about a complete Wipeout for what for m ost Chinese citizens is their primary and maybe even only method of savings
is going to do so by ripping the heart out of public support for the entire system and the CCP and the government in particular.
Now, of course, I cannot fact-check whether or not the CCP will loose support because this has not happened yet. But, I was not convinced by Zeihan’s argument that Chinese households are so much more exposed than the Japanese in the 1990s because they can only invest in h ousing. You see, while it is true that the Japanese could invest in the stock market more freely at the time, it didn’t help them much because the stock market collapsed along with house prices in the 1990s.
Still, Zeihan is right that an asset bubble at the end of a growth model can collapse an economy, as the U.S. economy did collapse in a similar manner in the 1930s. However, the reason that most experts believe that China’s eco nomy will stagna te like Japan, rather than collapsing like the U.S. is that its banks are state controlled and that, to keep popular support the CCP will likely keep the financial system from collapsing, limiting the losses of households.
Unless, of course, Mr. Zeihan is right that
4 China’s increased authoritarianism
will prevent it from responding adequately to all of these crises because
Chairman Xi has so thoroughly purged the system that it’s uncertain whether he can promptly recognize when action is needed, let alone formulate a coherent policy t o address emerging issues.
And, increased authoritarianism, is definitely an issue most China watchers are concerned about, as it can make a country far less attractive for foreign investment, doesn’t help to keep talented workers in the country, and indeed might cause a leader to make increasingly stupid decisions as nobody is willing to tell them the truth.
But, so far, I just don’t see that this is already as bad as Mr. Zeihan is telling us.
After all, for each major issue Zeihan has highlighted, I’ve consistently found relevant government policy addressing it. The Chinese are trying to get people to have more babies. They are modernizing their navy. They are stockpiling and inves ting in food & energy, and they were actually the ones to pop the property bubble because they thought it was getting too big.
So, I just don’t see any evidence that supports Zeihan’s statement that Xi has purged the system so thoroughly already that he can no longer respond to problems.
And so, having gone through all of Mr. Zeihan’s main arguments, I’ve now come to my
which, I’ve stated in the beginning of the video was that most of the se problems are either not as bad as they seem or will likely not lead to a collapse due to the unique structure of the Chinese economy with its state-owned banks.
So, what does that mean for Mr. Zeihan? How did he do during this fact-checking exercise?
Well, for me, it depends on your expectations. If you expected Mr. Zeihan to be an oracle of the truth, then I think this shows that you should really reconsider. However, for me personally, and, judging by your comments for many of you as well, following Zeihan is not about learning the absolute truth, it is about getting interesting and provocative insights. And, because in my career as an economist, I’ve never ever come across anyone that can consistently predict the future in such certain terms as, this country will collapse in 10 years, I’ve always taken his extreme predictions with a large grain of salt.
And, so, I’m happy to say that, after this fact-checking analysis, which was quite critical, I will actually continue to follow Zeihan in the way that I did, to get a broad overview and an interesting perspective on global issues. But, if I’m doing serious research, I will not rely much on the work of Mr. Zeihan too much. For that, I think he is too sloppy and too committed to his establish ed narrative.
But, yeah, that is my take, and while I reached out to Zeihan’s team for comment s before publishing this video, I did not receive a response yet. Hopefully, he will still do so in the comments of this video.
Lastly, I want to note that I am more positive in the conclusion of this video, than in similar videos about Johnny Harris and Economics Explained because of two reasons. The first is that Zeihan largely gets the big stuff right, even if he takes it to a ridiculous extreme. The second reason is that Zeihan does not present himself as a teacher or educator, but as a speculative analysist, and, yeah, I think teachers should be held to higher standards because their audience is less experienced.
Is that fair? Or have I been to generous, let me know in the comments. And if you think peer-reviews like this are essential for the YouTube information ecosystem, consider supporting my channel on Patreon or by becoming a member.