The Artillery of History takes aim at the Orient

And the world is asleep at the wheel

This post is in conjunction with a series of posts I will be publishing leading up to the publication of a book I am currently authoring covering many of the topics I will be discussing here. My promise to you is that this Substack will be free, forever, to you, my reader.

“Demography is destiny"

This phrase rings true in more ways than most might imagine.

Demographic decline has been a contentious topic for the past two decades in Japan, who’s population has been declining since the mid-late 00s, and more recently in the rest of the G7. Earlier this year, the yearly Chinese census showed the first negative natural change (births minus deaths) in nearly 60 years, while South Korea broke the record for the lowest fertility rate ever recorded for a sovereign country, again.

There has clearly been a lot of recent buzz on the dramatic demographic nightmare unfolding in East Asia, but markets have been slow to grasp just the serious long-term implications of East Asian demographic collapse.

In addition to China, Japan, and South Korea, Taiwan, Hong Kong, Macau, and Thailand have recently joined the club of shrinking countries who similarly suffer either from extraordinary low fertility (<1 children per woman) or terminally declining fertility.

There have been serious attempts to raise fertility in Japan, Taiwan, and South Korea for well over a decade now with little to no effect. Indeed, South Korea, the most egregious offender of infertility, has spent over $200 billion over the past 16 years trying to get their population to have more children.

China is now attempting its own fertility incentive program, but will it be able to stem the tide of sterility where its regional competitors have failed?

If trends continue, the Age Dependency Ratio (ADP) - the ratio of the working age population relative to the dependent population (age 0-14 and 65+) - in East Asia will skyrocket from last decade's low of 42 to well over 300, turning the “demographic dividend” into demographic quicksand.

In a nutshell, this is the problem of the 4-2-1 problem.

During the time of East Asia's relatively high fertility, the ADP was around 80, where for every 5 working age citizens there were 4 dependents.

With a current age dependency ratio of 50, East Asia has roughly 2 working-age persons per 1 dependent.

However, as the region continues to age at a rapid rate with fertility rates making new all-time lows year after year, China, Korea, Japan, Taiwan, Thailand, Hong Kong, Singapore, and Macau all face the same problem:

If one grandchild must care for four grandparents and two parents, without children the ADP becomes a whopping 600 or SIX-to-one.

As of 2022, the average women in Taiwan, Hong Kong, Macau, and South Korea is on average likely to have less than an 80% chance of only having even just one child in her entire lifetime. For Japan, China, and Thailand, things do not look much better, as the average number of children a women will bear during her lifetime hovers either at or just above one child per woman.

This, of course, is misleading - the real story is far worse. Fertility has been in a secular downtrend in every country worldwide for decades, with even the likes of Niger or Ethiopia breaking all-time lows in the average number of children born to a woman over her lifetime. This metric is called Total Fertility Rate (TFR).

TFR calculates the number of children born in a year relative to the number of women aged 15-45 (or in some cases 15-49) to estimate the average number of children a woman of child-bearing age in the present moment will have over her entire fertile lifetime.

TFR is more of just a real-time snapshot of the present fertility landscape in a given year and has not accurately on its own provided insight into what the future demographic landscape of a country, jurisdiction, or market may be.

General academic consensus has been, until recently, that once a country more or less develops and completes its demographic transition, its TFR will fluctuate slightly below replacement to slightly above replacement with a more or less stable population.

Empirical observation, however, has blown this presumption out of the water, with East Asia being the prime example as of current given the aforementioned jaw-dropping fertility implosion of the Far East. Every year, East Asian countries are making new TFR lows.

Korea alone with its current trajectory is in the very early stages of shedding ~8 million people of working age who will not be replaced by the up-and-coming younger demographic over the next 7-10 years alone.

Despite this, massive capital expenditures from foreign investors are still pouring into South Korea. These investments are 20, if not 30 or 40+ year long bets on South Korea. Domestic companies too like Samsung have recently committed to building the largest chip manufacturing facility in the world in South Korea.

Are investors expecting that a 51+ million strong country with more people than Spain or Australia who's population is likely to halve within our lifetimes to remain competitive, let alone politically stable over the next few decades? Note that the workforce will halve far sooner.

South Korea is a G20 country whose economy is larger than Australia, Mexico, Indonesia, and Saudi Arabia. Its long-term issuer default rating is AA- according to Fitch Ratings. This is important, because South Korea is also one of the few countries that issues 50-year bonds in addition to 30-year bonds.

With current demographic trends, will Korea, Japan, China, and parts of South Asia be stable environments for continued growth? Or is current investor behavior completely decoupled from understanding the implications of a regional population collapse in the world's manufacturing center?

Indeed, of the aforementioned countries, only Korea has put any serious effort in into keeping up with the current hiking cycle, although they have since fallen off at a 3.5% overnight rate despite being one of the first developed economies to begin a hiking cycle in late 2021 along with Norway. (Note that the US Fed took until March 2022 to start hiking).

With a complete collapse in the labor force in some of the largest manufacturing hubs in the world, what options does East Asia have? What options leave the region at least somewhat stable, if not intact? Is the region even salvageable, or are we sitting under the greatest geopolitical Earthquake in nearly half a millennium? How deep does this rot go? These are the questions I hope to at least preliminarily answer in the upcoming posts here.

To get a better idea as to what the future holds for East Asia, let us peer into the situation in the northern Chinese province of Heilongjiang. This industrial and agricultural province has been referred to in the South China Morning Post as “China’s northeastern rust belt.”

The population of Heilongjiang Province was, in 2010, a little over 38.3 million. Since then, it has declined nearly 17% to a bit under 31.9 million in 2020, a decline roughly equal to the population of the entire state of Indiana. This phenomenon is not solely due to domestic migration. As a matter of fact, the lowest fertility ever recorded in any jurisdiction was in 2000 in Xiangyang district of Jiamusi city in Heilongjiang, China. The region is merely a leader in a broader national, and now regional trend. Even the most fertile of all the major cities in China, the manufacturing goliath of Shenzhen, is around an audacious 1.0 child per woman as of 2020. Other large cities like Beijing have started to decline while in Shanghai the situation has gotten so bad that only about one out of every eight mothers from Shanghai has had a second child.

Rural areas are not faring better, in China or elsewhere in the region. Births among the rural youth have fallen faster than their urban counterparts. In Japan rural school closures have accelerated. In fact, China’s only short-term demographic advantage against any developed country is 20% less urbanized than say the United States for example. When China taps out that remaining rural population around the early 2030s, central planners in Beijing will be faced with the choice to either become geopolitically irrelevant in the midst of a rapidly declining workforce and population or embrace an unrelenting torrential flood of migrant workers to offset their critical manpower losses.

Korea and Japan have already started down the road of the latter as the reality of the former begins to set in. From 2013 to 2018 the number of foreign workers in Japan doubled. Recent reforms to immigration have sought to attract digital nomads in addition to more foreign labor in both Korea and Japan.

Even in the event of artificial womb technology becoming viable by magic in the immediate future, it would still take 15-20 years for these children of Marx liberated from the family to come of working age.

As to what are the social and political implications of either East Asia’s total economic collapse or total demographic reshaping from hundreds of millions of migrants puts the entire region into the crosshairs of danger not seen since the fall of the Bronze Age Collapse. With broad nuclear arsenals, rogue states like North Korea biding its time until Seoul’s annexation, and the largest die-off event the region has ever seen in recorded history, the world is asleep at the wheel as the artillery of history takes aim at the head of the Orient.