Kevin Rudd's mistakes in China were a big setback to relations with our biggest trading partner and last July I urged Julia Gillard not to make him Foreign Minister should she win the election. She did not take my advice.
However, Australia's lack of knowledge of what is really happening in China covers a wide area. For example, both Treasury and our mining companies (led by BHP and Rio Tinto) have long-term China growth predictions that do not appear to take into account the fact that China is rapidly headed towards being an elderly society. Our second largest trading partner, Japan, has an even worse ageing problem.
The following graph highlights the China problem. China's population will keep rising until 2030, when it begins to decline. At that time China's working age population will have flattened and will begin to decline.
The percentage of young people in the population is plummeting while the percentage of elderly (over aged 65) is rising. Soon after 2030, for the first time in its history, the elderly in China will exceed the number of young people. Some China observers say that the trends shown in the above graph are accelerating and the crossover point (when elderly exceed young people) will be around 2030 – just over 19 years away.
In a very short time our biggest market is going to be nothing like it is today and will not enable China to maintain the sort of boom that Treasury and the Government are depending on to maintain Australian prosperity.
Right now Treasury is correctly worried that China's inflation will adversely affect China and the world. Inflation can be fixed but it's too late to alter the demographic change.
The graph below shows Japanese population trends, and reveals where China will eventually head.
In the next 20 years the Japanese working age population will plummet to represent just above 35% of the total population. Elderly people will approach 45% and of course the percentage of young people is in steady decline. Unless Japan finds a way to reverse those trends via immigration then it will not be easy for Japan to maintain its current position as our key resource customer. It is possible that India and other parts of Asia may fill the Japan-China gap but the sort of population trends we are seeing may increase instability in the region.
Australian institutions whose idea of a long-term plan is around 12 months simply can't comprehend thinking 20 years ahead, but that's exactly what our largest miners must do. For example, BHP is going to spend six years simply removing over burden at Olympic Dam.
It will not reach full production capacity until around 2020 and by that time the sort of trends we see in the above graphs will be affecting the markets.
This article first appeared on Business Spectator.
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