China is a country of superlatives. It is the third largest country in the world, after Russia and Canada, only trails India in population, and is either the second largest or largest economy in the world, depending on whether one counts Gross Domestic Product measured in US dollars or in the amount those dollars can purchase in China or the U.S. 

It also has a dubious distinction as it leads the major developed nations in economic clouds on the horizon. China is paying the price of policy and biology, with a dollop of affluence affliction mixed in. 

From 1980 to 2016, China’s one child policy spanned two generations and shall have an effect for generations to come. This policy was designed to encourage production over diversion of resources to child rearing, and also had the effect of selective child bearing to favor males rather than females. It also resulted first in a generation of children without brothers and sisters. Second generation one-child policy children had neither siblings nor cousins, aunts and uncles. Imagine the isolation. The extended family is weakened as siblings vanish and the nuclear family collapses in size.

This policy has backfired in a number of other ways. The advantage of males over females has declined. In nations such as the U.S. and Canada, more females go to and excel in college than males. And China’s manufacturing industries that are the lifeblood of its economic miracle can just as easily employ females. The resulting imbalance between males and females over two generations has also limited child bearing even further since procreation depends on the lesser numerator of each gender relative to people of child-rearing age.

India did not have such a formal policy, and has since raced past China in overall population. We shall save a potential India Miracle for another week. Meanwhile, China continues to struggle with a shrinking workforce and a worsening ratio of the elderly compared to the working population. Fewer people are trying to support their parents, and, with no siblings for two generations, there is a reduced capacity to care for their parents. 

The implications of the one-child policy is also inducing a breakdown in the housing market. At the broadest stroke, the amount of housing capacity is a product of the number of households times the expectation of space per person. As the number of households declines over what it might have otherwise been because of the one-child policy, the need for housing declines. This effect has been masked by affluence. Higher income has to now increased the expectation of space. 

This latter expectation of more housing space is highly dependent on income and optimism. As other economic forces combine to create a sense of pessimism, the housing demand balloon has deflated. 

This deflation is in a sector that is far larger than elsewhere. Investment in housing had until recently represented approaching 30% of the economy, and was a large factor in China’s economic growth. This sector has all but collapsed over the past couple of years, with the world’s second largest housing developer, Evergrande, just filing for bankruptcy as their shares plunged first by 90% and then to zero. This development investment collapse comes at a time when local and state governments in China have been overinvesting in infrastructure to pave housing development’s way. These state and local debts are now at staggering levels that may also portend to future bankruptcies and even greater deterioration of consumer confidence. 

With this failure, the wealth of many households has been damaged or wiped out, as have their deposits for new apartments. In China, housing demand to now had been so furious that people would pay well in advance for a right to a new apartment yet to be built. Much of that wealth has disappeared, and, with it, a huge engine in economic growth and in consumer confidence. 

At the same time, China is suffering from the affluence affliction. With greater affluence comes a reduced need to have children as an economic security blanket as parents retire. Most developed nations are barely at or have fallen behind in replacement population procreation. Some countries, most notably Canada, have recognized that they can make up for potential population declines through immigration. However, many other countries have politicized immigration and tightened their borders, with Canada left with the luxury of picking up the most skilled and highly trained workers worldwide. 

The equilibration effect of reduced procreation is a large part of the reason why spectacular economic growth China realized a decade or two ago cannot continue forever. In my book, The Rise and Fall of an Economic Empire, published in 2010, I estimated that China would overtake the US in economic output by the 2020s. Indeed they have if one measures their income based on buying power, but is second if measured in U.S. dollars. This is the result of China’s currency that remains undervalued compared to the U.S. dollar by China’s design, to continue to keep China’s manufacturing output cheap and in demand. 

China is also suffering from another aspect of the affluence affliction. Their hubris has created a sense of overconfidence in their leadership. Just as an individual investor mistakes their rising portfolio in a rising market as partly due to their incredible insights, China’s leadership has patted itself a bit too much for China’s economic successes. They have converted some of this economic power into political power. We see Chairman Xi pretty puffed up in his body language when he meets with other world leaders. 

However, this political consolidation and hubris is having domestic consequences, especially among the young who are less enamored with central planning and more entitled as only children. The implicit social contract that offered their population economic freedom as a substitute for political freedom tends to wear thin when economic progress wanes. 

Add to this perfect storm of demographic pressures, investment perils, and arrested economic progress is the recent Chinese posture of global empire building. As a symbol of this growing dysfunction, China’s government recently released a map that shows new swaths of territories, in India, Russia, and their South China Sea neighbors that China asserts belongs to them, now or soon. This saber rattling is costly, both in necessary defense expenditures and in their ability to appear as a benevolent international partner.

These are the concerns of autocracies, and some of these ingredients have damaged aspiring nations in the past. We shall see how China will navigate these forces in the future while at the same time they try to ward off a deflation-induced recession as a result of reduced consumer confidence that pushed Japan into a decades-long economic funk over similar forces that are far less severe than China is experiencing.

Of course, renewed investment and a removal of recent constraints to entrepreneurship can reverse some of these huge drags on their economy. That willingness to create more economic and political freedom to unleash Chinese creativity seems unlikely in the near future, though.