YouTube’s favorite geopolitical analyst, Peter Zeihan, 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 entity and an economic entity within a decade.
0:16 But is this prediction about China’s imminent collapse based on solid arguments, or is it just sensationalist nonsense meant to get views?
0:27 To find out, I’ve spent the last week diving deep into the data and logic supporting Mr. Zeihan arguments and comparing them to arguments and evidence put forward by other experts.
0:38 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 and energy that its debt fueled investment led growth model is quickly running out of steam as its gigantic housing bubble pops.
1:17 And finally, that the country is increasingly authoritarian, which means that its leader is getting more isolated and therefore potentially will not be able to respond to these problems.
1:29 But are these problems really so bad that they will lead to the collapse of the Chinese economy in the next ten years? Or is Mr. Zeihan making them look far worse than they are to support his narrative?
1:46 After all, Mr. Zeihan has been predicting that China’s economy will collapse in the next decade. Already since 2010, which so far has not happened.
1:58 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.
2:14 So let’s dive into each of these arguments now. Starting with Mr. Zeihan’s main argument about China’s demographic collapse.demographic collapse The core of this argument is that, as Zeihan writes in the US financial newspaper Barron’s, China’s labor force and population have already peaked in the 2000 and tenths, and China’s population will be half by 2050.
2:39 And this is a problem for two reasons.
2:43 First, it is a problem on the demand side because most of the consumption in the modern system happens when you’re in your twenties or your thirties when you’re buying cars and raising kids and building homes.
2:53 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.
3:03 So Mexican labor is now one third the cost of Chinese labor and so despite Trillions of investment and a bottomless supply of intellectual property theft, they really haven’t advanced technologically in the last 15 years.
3:16 And therefore and now it’s obvious that this system is breaking down.
3:22 The demographic collapse is not correctable. There are not enough people under age 40 for them to even try, even if they had the macroeconomic structures that allowed or encouraged people to have families of the road.
3:34 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.
3:47 Now, immediately, what Mr. Zeihan said about most consumption being done by people in their twenties and thirties really didn’t sound right to me.
3:55 And indeed, when I looked into it, I found that in modern systems now most consumption is actually done by those over 35 years old simply because they earn more money.
4:05 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 does 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.
4:28 So even if there are fewer young people in China this will not decimate consumption immediately.
4:35 Similarly, I was actually very skeptical of Mr. Zeihan’s claim that China did not advance technologically in the last 50 years.
4:44 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.
4:57 And indeed, when I checked by looking at Harvard’s economic complexity database, which ranked economies based on how advanced their exports are,
5:05 China clearly clearly moved up the value chain quite a lot in the last 50 years, even surpassing Mexico a few years ago.
5:14 So the fact that Chinese labor costs are now higher than those in Mexico will not necessarily kill its industries, just as Japan’s wages being higher than those in China does not mean that Japan’s entire industry will collapse.
5:29 But okay, even though some of Mr. Zeihan’s arguments are clearly not true, most experts I found, agree that China’s demographic decline is still a really big problem. And as I often mentions, probably and not correctable through immigration.
5:48 And indeed, as you can see from the red line in this graph published by The Economist.
5:53 China’s a working age population has indeed already peaked
5:57and will likely fall rapidly.
6:00However, that still does not mean that China will collapse
6:05because after taking a closer look, I found three more
6:09big problems with Zeihan’s analysis.
6:12First of all, while
6:13there are many estimates about China’s population trajectory, Mr.
6:17Zeihan only talks about the most extreme population prediction that he could find.
6:22Importantly, he does refer to legitimate research.
6:25I have to admit.
6:27However, he hardly ever mentions that there are other well-known studies
6:31such as this one in the prestigious medical journal The Lancet,
6:34which estimates that China’s population will only have
6:38by 2100, not 2050
6:41or that the UN is even more optimistic as it lives.
6:45China’s population will only shrink by 8% up to 2050.
6:50Of course, Mr.
6:51Zeihan might very well be correct to pick the most pessimistic research.
6:56However, I still think it is important to keep in mind that this is what he does.
7:00He picks the most pessimistic view.
7:02The second problem, though, is more problematic.
7:05You see, well, Zeihan is right that China’s population
7:08decline will probably not be offset by immigration.
7:12He fails to mention that there are other options,
7:15especially to offset the decline in the labor force.
7:19For example, legendary financial Times economics commentator Martin Wolf has
7:23argued that the fall in China’s working age population for the next ten years
7:27represented by this blue bar, can actually be fully compensated
7:31by moving more people from China’s underdeveloped villages to the cities.
7:36Which is this light blue bar here, and the rest of it can be made up
7:40by simply increasing the retirement age above 60,
7:44which is represented by the final blue bar over here.
7:48And then we haven’t even talked about the third big problem with Mr.
7:53Zeihan’s demographic story, and that is that historically, the connection between
7:57demographics and economic performance is really not that clear after all.
8:02As you can see here, China’s population surged
8:06well before its economy took off.
8:09What’s more, there are other countries like, for example, Nigeria,
8:13that saw a huge population increase
8:16and not much of an economic increase.
8:19Similarly, there are countries like Bulgaria,
8:22which lost almost 10% of its population last decade,
8:25but whose economy still grew quite a bit as workers got more productive.
8:30And given that Chinese productivity really has not yet caught up
8:34to even a country like Poland.
8:36It’s really quite possible that China’s economy will keep growing
8:39as its population shrinks, just as Bulgaria’s economy did.
8:44Still, while Zeihan might get some basic facts wrong and might overstate
8:49the damage that a population decline will have in the next ten years,
8:53his assessment that China’s population decline is exceptionally fast and will be
8:58damaging is shared by most experts that I found,
9:02including those in the Chinese government, by the way,
9:05which has therefore relaxed its one child policy and put in place
9:09other measures to encourage bigger families.
9:13However, as Mr.
9:14Zeihan notes in his Barrons piece, this or might not matter
9:18given that unlike the US, China imports the vast majority of its energy
9:23as well as the inputs used to grow its food.
9:27And that brings us to Zeihan’s.
9:29Second argument about China’s imminent demise, which is event.
9:34China faces a food and energy disaster as the US Navy retreats.sponsor
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11:21China faces a food and energy disaster
11:25as the US Navy retreats, an argument that comes from Zeihan’s latest book,
11:30The End of the World is Just the Beginning,
11:32in which he predicts that having secured energy independence,
11:36the US is likely to stop policing the global oceans.
11:40Which means that international trade will
11:43once again be vulnerable to piracy.
11:46And China? Well, according to Zeihan.
11:49China is they are the most vulnerable country in the world right now.
11:54And based on how things go with Russia, we’re looking at a significant amount
11:58of raw materials falling off the map, specifically food and energy.
12:04And the Chinese are the world’s largest importer of both of those things.
12:07So there’s no version of this where China comes through looking good.
12:12And the challenge for the rest of us is to figure out how do we
12:16in as smooth and quick as a process as possible,
12:20figure out how we can get along without them because they are going away
12:25and they’re going away this decade for certain.
12:27But again, after a bit of digging, I found three big problems with this argument.
12:34First, and most obviously, the fact that China should depend
12:38on the US Navy for protection from pirates is something
12:42I really couldn’t find any other expert being concerned about.
12:48Zeihan himself states in an interview
12:51that the US Navy is no longer ideal for protecting merchant ships,
12:56as it relies too much on aircraft carriers
12:59that can destroy small nations like Iraq
13:01and not enough on ships that can patrol the global oceans.
13:05Which was weird to me, given that China’s navy
13:09has actually focused on smaller ships and has thereby already
13:13overtaken the US Navy when it comes to the number of ships that it operates.
13:18As you can see in this graph here from the BBC,
13:21and given that the Chinese are
13:24increasingly building bases overseas to say that the Chinese
13:29need the US Navy to protect their merchant ships from pirates
13:33just seems hopelessly outdated to me.
13:36But I did find that most experts still consider the US
13:41Navy the more powerful one.
13:43So maybe in a conflict with the US,
13:46China could still face crippling energy and food problems, right?
13:52Sure. On the surface, Mr.
13:54Xi’an is absolutely correct that China imports more food and energy
13:58than it exports and that this has gotten worse over time.
14:02However, after digging a little bit deeper into why I found that
14:06one of the main reasons for this is likely that China simply got richer.
14:10And after a couple of food scandals at home,
14:13the Chinese started to develop a preference for imported foods.
14:17A second reason is that, as Mr.
14:19Zeihan says, farmland is relatively scarce in China.
14:23For that reason, food is indeed more expensive to produce in China,
14:27which has allowed foreign farmers to outcompete the Chinese ones.
14:32But that doesn’t mean that China will starve.
14:34After all, if China’s access to foreign foods gets compromised,
14:39then Chinese farmers will once again become more competitive.
14:44But then you might say you’re not.
14:47Farming takes a long time.
14:49The Chinese cannot start farming quickly in case of an emergency.
14:54And yes, that is probably why the Chinese government
14:58has been building a large national stockpile of food
15:01precisely to weather the emergency that Mrs.
15:05AI predicts could very well cripple it.
15:08So, yes, food security is a potential problem in China.
15:13But in my opinion, it is really not as bad as Mr.
15:17Zeihan makes it out to be, which is very similar to what I found for energy.
15:24China is currently depending on foreign energy
15:28products and gets lots of it from Russia.
15:31So if Russia were to collapse, that would be a big problem for them.
15:35But it wouldn’t be catastrophic.
15:37The United States has sanctioned some of the biggest energy producers
15:41in the world, like Iran and Venezuela,
15:44all of whom are now friends with China.
15:48So it could also get energy products from them.
15:51And just as with food, the Chinese government
15:54has been stockpiling oil just in case of an emergency.
15:58And this is working hard to become energy independent by investing massively,
16:03massively into alternative energy sources such as coal,
16:07as well as clean ones such as solar and wind power.
16:12So just as with food and the dependance on the US Navy, while Mr.
16:16Zeihan could of course be correct, I was not at all
16:20convinced by his arguments and the evidence that he presented.
16:24Luckily, I was much more convinced by the evidence that Zion
16:28used to back up his next argument, which is China’s failing growth model.failing growth model
16:34But more than that, I was actually really impressed by Zion’s
16:37simple explanation that so the Chinese follow a capital
16:41intensive investment model and that all of the East Asians
16:44have followed this pattern to a certain degree.
16:46The problem with this pattern, this type of growth, is if you do it
16:50enough, you start to distort the economy and you absorb more and more capital
16:54and more and more labor and more and more resources.
16:56And eventually you get to the point where there’s diminishing returns
16:59because you only need so many roads, you only need so many factories.
17:03In the case of Japan, they reached this point in the 1980s
17:08and they went from having stratospheric growth
17:10because this generates a lot of economic activity
17:12to just kind of a stall out because that comparison with Japan
17:16is basically aligned with the story of China expert Professor Michael Pettis,
17:21who is one of the most influential analysts on this issue at the moment.
17:25But this also highlights the problem that I have with Xi’an story,
17:30because unlike Professor Pettis, Zeihan does
17:33not predict a Japan style stagnation.
17:36He predicts an economic collapse because unlike in Japan at the time,
17:41you’re talking about a complete wipe out for what for most Chinese
17:45citizens is their primary and maybe even only method of savings,
17:49and that it’s going to do so by ripping the heart out of public support
17:54for the entire system and the CCP and the government in particular.
17:58Now, of course, I cannot fact check whether or not
18:01the CCP will lose support because this has not happened yet.
18:05But I was not convinced by Zeihan’s argument
18:08that the Chinese households are so much more exposed
18:12than the Japanese were in the 1990s because they can only invest in housing.
18:17You see, while it is true that the Japanese could invest
18:19in the stock market more freely at the time, it didn’t help them that much
18:24because the stock market collapsed along with the housing market in the 1980s.
18:29Still, Xian is right that an asset bubble at the end of a growth
18:33model can collapse an economy, as the U.S.
18:36economy did collapse in a similar manner in the 1930s.
18:40However, the reason that most experts believe that China’s economy will stagnate
18:44like Japan rather than collapse like the USA did in the 1930s,
18:50is that China’s banks are state controlled and that to keep popular support,
18:54the CCP will likely keep the financial system from collapsing,
18:58limiting the losses of households and less, of course.
19:02Mr. Zeihan is right that China’s increase authoritarianism will prevent itincreased authoritarianism
19:08from responding adequately to all of these crises
19:12because and Chairman Xi is so purged the system that it’s an open question
19:16whether he can even become aware in a reasonable amount of time
19:19that something needs to be done, much less have the capability
19:23to come up with a coherent policy to deal with whatever the issue is as it arises.
19:28And increased authoritarianism
19:30is definitely an issue most China watchers are concerned about,
19:34as it can make a country far less attractive for foreign investment.
19:39It doesn’t help to keep talented workers in the country and indeed
19:42might cause a leader to make increasingly stupid decisions
19:46as nobody is willing to tell them the truth.
19:49But so far, I just don’t see that this is already as bad as Mr.
19:55Zeihan has been telling us.
19:57After all, for each of the major issues that Zeihan highlighted
20:01and that I’ve looked into, I’ve consistently found relevant
20:05government policy, coherent government policy addressing it.
20:09The Chinese are trying to get people to have more babies.
20:12They are modernizing their navy.
20:14They are stockpiling and investing in food and energy.
20:17And they were actually the ones to pop the property bubble
20:21because they thought it was getting too big.
20:23So I just don’t see any evidence
20:26that supports Zeihan’s statement that she has burned the system.
20:30So thoroughly already that he can no longer respond to the problems coherently.
20:35And so having gone through all of Mr.
20:37Zion’s main arguments, I’ve now come to my conclusion,
20:42A way to have stated in the beginning of the video was that
20:45most of these problems are either not as bad as they seem
20:49or will likely not lead to a collapse due to the unique structure
20:54of the Chinese economy, with which I meant
20:56that it’s led by state owned banks.
21:00So what does that mean for Mr. Zeihan?
21:03How did he do during this fact checking exercise?
21:07Well, for me, it depends on your expectations.
21:11If you expected Mr.
21:12Xi’an to be an oracle of the truth,
21:15then I think this shows that you should really reconsider.
21:19However, for me personally, and judging by some of the comments that you made
21:23on a post that I made following a Zeihan is not about learning the absolute truth.
21:29It is about getting interesting and provocative insights.
21:32And because in my career as an economist, I have never, ever come across
21:37anyone that can consistently predict the future in such certain terms that Mr.
21:42Zeihan likes to use, such as This country will collapse in ten years.
21:46I’ve always taken his extreme predictions with a very large grain of salt,
21:51and so I’m happy to say that after this fact checking analysis,
21:55which was quite critical, let’s be honest, I will actually continue to follow Mr.
22:00Zeihan in the way that I did to get a broad overview
22:03and an interesting perspective on global affairs.
22:06But if I’m doing serious research,
22:09I will not rely too much on the work of Mr.
22:11Zeihan because for that I think he is too sloppy and too
22:15committed to the story that he has been telling for such a long time.
22:19But yeah, that’s my take.
22:21And while I reached out to Zeihan’s team for comments
22:25before publishing this video, I did not receive a response yet.
22:29Hopefully he will still do so in the comments of this video.
22:34Lastly, I want to note that I am more positive.
22:37I think, in the conclusion of this video than in similar videos that I did
22:42For example, Johnny Harris and Economics Explained because of two reasons.
22:46The first is that they largely gets the big stuff right,
22:51even if it takes it sometimes to a ridiculous extreme.
22:55The second reason is that Zeihan does not present himself
22:58as a teacher or an educator, but as a speculative analyst.
23:02And yeah, I think just that teachers should be held
23:05to higher standards because their audience is less experienced.
23:10Is that fair?
23:11Or have I been too generous?
23:13Let me know in the comments.
23:15And if you think peer review kind of videos like this are essential
23:19for the YouTube information ecosystem,
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23:29using the links in a description of this video.
23:31Finally, if you’re watching this, it could be that I just released my own
23:35in-depth video about the Chinese growth miracle and why it’s now stagnating.
23:41And you can check it out over here.
23:42But if I didn’t do so yet, then consider taking out this playlist over here
23:46that contains my other fact checking videos.