Xi Jinping arrives in Washington later this month; when the two presidents met in Beijing in May, Xi reached rhetorically for the “Thucydides Trap” — national security scholar Graham Allison’s framing of a rising power and an established one stumbling toward an unnecessary and accidental conflict. He may reach for it again; but as we discuss below, it’s a bad framing and the story flatters both China and the U.S. while failing to identify what’s very different about China and its current political and geopolitical direction.
But set the summit aside, because the most consequential thing about China this year is a number that won’t be mentioned. China’s fertility rate was 0.82 last year, against roughly 2.1 needed to hold a population steady — a collapse with no modern precedent, no war or financial crisis behind it, and so far, no persuasive explanation from anyone. You might think that this demographic collapse would evoke some policy response to rebalance toward the consumer — the one thing nearly every long-run forecast assumes it eventually must. But as we describe below, the retrenchment of a totalitarian form of governance under Xi Jinping continues to work against this rebalancing that analysts have so long predicted, but which never seems to arrive.
0.82
China’s total fertility rate — the number of children an average woman would bear at current birth rates — averaged 1.65 across the two decades through 2017 and was still 1.50 in 2019. Last year it was 0.82. A fall of nearly 0.70 in six years has no peer anywhere. The rest of the world lost 0.16 over the same stretch, which is exactly what it lost in the five years before Covid. No Asian sub-region lost more than 0.26. The only comparable collapse is Central Europe’s roughly 0.50, and that followed a war breaking out on its border.
China’s happened in peacetime, at a per-capita income near $13,000 — where its peer countries average a 1.62 fertility rate. We don’t normally see rates this low until income is two or three times higher. Hong Kong, Singapore, Korea and Taiwan are lower today, but every one of them has been ultra-low for decades; the speed of China’s change is what is unique. Jonathan Anderson of Emerging Advisors Group, who assembled the comparison, is blunt about the state of the explanations: every internally consistent story — the housing bust, youth unemployment, slower growth — falls apart the moment you check it against countries that had the same problems and did not see the same collapse.
This is the largest peacetime demographic shock on record, and nobody has a credible account of why it’s happening. But whatever the cause is, it has consequences for global markets.
What Every Forecast Has Predicted For the Chinese Economy
Chinese households consume an unusually small share of national income — the oldest known problem in that economy. The expectation that Beijing will eventually correct it, shifting income toward families through transfers, a broader safety net and cheaper healthcare and schooling, is embedded in almost every long-run forecast written about the country. A shrinking, aging population sharpens that case even more: fewer workers and more dependents is precisely when an investment-led model runs out of people to sell to.
It keeps not happening. When the property market broke in 2021, the credit went to factories. It is going now into power grids and data centers — a program Beijing calls the “Six Networks,” with a planning target to invest 20 trillion to 25 trillion RMB (roughly $3 to $3.7 trillion) from 2026 to 2030, financed through policy banks and central state enterprises rather than the land sales that funded the last cycle. That is a real and substantial commitment of capital; it works out to nearly 3.5% of China’s GDP. It is emphatically not a turn toward the consumer.
Fifteen years of forecasts have assumed a rebalancing toward Chinese households. Fifteen years of capital have mostly gone somewhere else.
This letter is general commentary — the wide-angle view. It is not a portfolio. What we do for the families we work with is the opposite of “wide-angle”: we make portfolios built around one household’s circumstances, taxes, timelines, and appetite for exactly the kind of volatility described above. We keep that roster of clients deliberately small, because that sort of attention doesn’t scale. If you’d like to talk about what it would look like for you, Aubrey Ford will make the time.
Why It Hasn’t Happened
Chenggang Xu, a Harvard-trained economist now at Stanford, argues that the distinction that matters is not authoritarian versus democratic, but authoritarian versus totalitarian. In an authoritarian state, however harsh, some institutions survive outside the party — a church, a temple, a civic association — so long as they mostly stay out of politics. A totalitarian state tolerates essentially none. Put a country in the wrong category, Xu says, and you “apply a whole set of policy tools in the wrong way.”
We cite him for the analytical point rather than the political one; that point bears directly on the puzzle above. In most countries an economy that is this uncomfortable… eventually forces a change of policy. Households whose main assets have lost value and whose children cannot find work (current youth unemployment is running at almost 18%) make themselves heard — through a temple or a church, a union, a trade association, an independent newspaper, a local official with his own base of support, and in some places, if they’re lucky, a vote. Then governments end up putting money in people’s pockets by transfers or by economic policy.
Xu’s point is that an ordinary authoritarian state still has some independent voices and institutions, but a totalitarian state has no one to invoke real change. The economic discomfort is real, and yet there is nothing mediating between the household and the party to carry it upward — nor do the rulers care in the same way as those who serve at the good pleasure of an electorate, or who have to deal with the pesky voices of a living civil society independent of the state.
Xu is not a lifelong China hawk, which makes his case more noteworthy. His most-cited paper, in 2011, labeled the system “regionally decentralized authoritarianism” — NB, authoritarian, not totalitarian — and at that time he expected reform to carry further. His view has been revised after watching the retrenchment and power consolidation that has taken place under Xi.
Some Themes of China Talk That Are Just Temporary
Two other things about China get more attention than demographics, and both are temporary — which is why in our view it’s a little silly building a thesis on either of them.
The first is minerals. China refines roughly 90% of the world’s rare earths and holds near-monopolies in gallium and germanium, and the arrangement easing its export controls expires November 10. But this kind of leverage decays the moment it is threatened or used. Inventories build, customers diversify, capacity that was uneconomic becomes viable. The ten-year floor prices for Western producers now written into Western supply agreements are the antidote — China can’t use state subsidies to undercut a competitor who is guaranteed a floor by his own government. Capacity is going up outside China and the clock is running. Beijing appears to know it: their tactic was to squeeze hard in 2023, and then ease as the floors are established. The strategy shows that China understands its leverage has a limited shelf life.
The second is monetary. With the Fed’s liquidity growth weak and the Bank of Japan and European Central Bank shrinking their balance sheets, the People’s Bank of China is currently what holds global liquidity up, and Michael Howell of Capital Wars finds gold tracking Chinese liquidity while bitcoin tracks the Fed — which the year’s gold tape fits, from $5,300 in March to $4,000 when Chinese injections stalled and back toward $4,500 now they have resumed. But that’s just a fact about this quarter’s relative central bank postures, and it will shift as those postures shift. It’s a useful piece of information for a trader of gold, but not a cogent justification for a long-term holder.
What We Take From It
Any forecast that has Chinese consumers eventually picking up the slack — for global growth, for commodity demand, for the export markets of everyone who sells into Asia — is assuming a mechanism that’s highly uncertain. We think there are plenty of reasons for optimism about global growth, and next week we’ll touch on the positive overall growth landscape — but the Chinese consumer isn’t currently high on the list.
The near-term conclusions are smaller and contingent. If you own gold, own it knowing Chinese liquidity has priced it this year and that this is a seasonal truth, not a structural one; don’t let Chinese liquidity underwrite a long-term gold holding, you need other reasons for that. The “Six Networks” program, on the other hand, is bidding for the same transformers, copper, and grid equipment the American AI buildout is short of, which strengthens the thesis we have held all year, of ferreting out AI bottlenecks both obvious and obscure.
And Remember, This Is About U.S. Equities Too
You can own no Chinese equities at all — most of our clients currently own none — and still have China priced in some way into nearly every position you hold. It remains the world’s export machine, and the goods on American shelves, the components inside American factories and the inputs feeding the American AI buildout have prices that reflect, in part, decisions made in Beijing. A China that never turns toward its own consumers is a China that has to keep selling to others’, which keeps pressure on the margins of every American manufacturer competing with it and challenges the assumed inevitability of some demand growth that commodity and industrial forecasts have spent a decade incorporating. We’re not saying China will never rebalance towards its consumers — we’re saying you can’t assume it will, that you have to watch what’s actually happening on the ground.
And a word on China’s influence on oil prices. With the Strait of Hormuz disrupted and Iranian barrels effectively off the market, Chinese refiners have gone shopping in Congo, Canada, Brazil and Argentina, pushing the premium on Congo’s Djeno crude to as much as $20 a barrel over Brent this week from around $15 two weeks ago. Some of that buying is restocking rather than burning — Chinese refiners are rebuilding commercial inventories into the spike, which is one reason the bid has been so aggressive. If oil is what moves market sentiment most days, and at the moment it is, Chinese inventory policy is affecting the behavior of your portfolio whether you want it to or not. And also, if you’re hoping for oil prices to go down, don’t expect China to help right now.
Thanks for listening; we welcome your calls and questions.
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