China and its Demographics Part II

Last year in December we wrote an article about China and the demographic challenges they have to tackle in the future. A major growing issue they are facing is the potential social unrest caused by unemployed people in the cities where they are experimenting with capitalism. And this unrest is mounting. Over the last three months more then 20 million people lost their jobs due to the crisis and a drop in exports globally. A lot of those people are simply sent back to their villages inland where they were low paid farmers before they came to the big cities to look for fortune.

In our article we also referred to a possible way the Chinese government would deal with this problem, by expanding their military force to suppress the social unrests. (cfr “The Dark Theory” )

There were already indications over the last couple of years they were heavily investing in their army and last week some further confirmation hit the screens that this is the way they are moving forward and in turn will have an impact on domestic economic growth.

Chinese spokesman Li Zhaoxing confirmed that China would further boost its defence spending by raising salaries of the army and also expand spending in the further build up of their naval and space capabilities. China’s military spending will now total $ 70.3 bln on an annual basis.

Obviously, immediately thereafter came a response from the US Defence Department (David Sedney) by insisting they wanted clarification from China on the connection between its developing military capacity and strategic objectives.

It is, obviously, nothing compared to the budget that the US is spending on its military complex, $ 513 bln for 2009. However, the actual number of China is much higher (as all data produced by the Chinese government is). Based upon data from the International Institute for Strategic Studies (IISS), the official numbers don’t include overseas weapon purchases and research and development. As a consequence the IISS estimates the real number should be much closer to $ 120 bln.

Probably part of their ambition is to expand their influence in the region. What else would you do by ordering the building of a new aircraft carrier, the construction of a new space launch centre (meteorological and telecommunication service centre) for military purposes? However these investments have a much more crucial objective: a tool to keep social unrest under control.

Therefore we also argue that the recent improvement in economic data from China can be explained by an increase in their military spending. The Purchase Manager Index in February was up towards 49 coming back from 35 the month before. Also bank lending was on the rise again.

However we doubt whether this news is as good as the market perceived it. The rise of the PMI is completely due to a rise in government spending. Stocks of warehouses are still massively piling out, ships are still waiting in the ports to deliver their goods. Export numbers are still depressed.


Source: John Mauldin weekly newsletter / www.stratfor.com

Even their import numbers are falling of a cliff which is indicating that domestic demand is as weak as global demand. Therefore it makes sense for the Chinese government to ease the pain that is caused by the global recession to offset this by an expansion in government spending – read military spending. Through this, the Dark Theory becomes ever more concrete.




(1) D. Smick “The World is Curved, 2008 Marshall Cavendish