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