At Economic Club of Minnesota, banker says China's boom in the past

China is unlikely to displace the United States as the world's greatest superpower, an investment banker from Hong Kong told the Economic Club of Minnesota on Monday.

Timothy Beardson, author of "Stumbling Giant: The Threats to China's Future," pointed to an aging population that's about 15 years from peaking, a lack of innovation, a rising cohort of young men who will not be able to find wives, a dysfunctional financial system and environmental degradation.

"By the time we move into the 2030s — 15 years from now — we'll probably be saying that China will have done pretty well if it achieves an annual economic growth rate of 2 percent," Beardson said.

China is the second-largest economy in the world, with economic growth rates of near or above 10 percent for most of the past 30 years. It is also Minnesota's second-largest trading partner, behind Canada.

Beardson, who founded the first foreign investment bank to operate in China, told an audience that included tables of 3M, Best Buy, General Mills and Cargill representatives that the fundamental challenge for the country is demographic.

Once China's population peaks in the late 2020s and begins to fall dramatically over the rest of the century, the nation will struggle to maintain economic growth.

"When China looks at the other challenges that it has in front of it, whether it's cleaning up the environment, whether it's trying to build an innovative education system or a functional financial system, it really needs to address those much-needed areas while it still has decent levels of economic growth," Beardson said.

Even China's $3.5 trillion in foreign currency reserves are not necessarily a strength, Beardson said. China borrows money to buy foreign currency, mostly dollars, and the interest it gets on U.S. Treasurys is less than the interest it pays on about $3 trillion it has borrowed at home to buy the currency, he said. The Chinese government likely loses $60 billion a year on the mismatch.

"You could even say, if you want to be colorful, that China increasingly resembles the largest highly leveraged and undiversified currency hedge fund in the world," he said.

Chinese leaders acknowledge that the economy must shift away from factories and exports toward domestic consumption, services and innovation, but efforts to transform the economy have so far been unsuccessful, Beardson said. The social safety net is too thin to encourage people to spend money, and the education system is geared toward rote memorization, not the critical thinking that's necessary for invention.

Part of the reason wages have been rising in China — prompting some companies to shift production to countries like Mexico — is that the workforce is shrinking. The number of births in China per year has fallen 40 percent since the 1970s, Beardson said. Over the next 15 years, the number of Chinese people over 65 will triple from 100 million to 300 million.

Older people are taken care of by their kids in China — only 1 percent of the elderly in China are in some kind of nursing home. But this will change as each working family will be responsible for four aging parents and in some cases, eight grandparents.

Because Chinese culture prefers male children over female children, there are six boys born for every five girls, Beardson said.

Soon there will be 50 million young Chinese men, generally the ones with the least education and economic opportunity, who cannot find a wife, Beardson said. This is already pushing up crime rates in major cities as young males head for urban areas.

"50 million is not that different from the entire population of France, thronging the Chinese cities — angry, inarticulate, unhappy," Beardson said. "Eventually it's going to have an effect on social stability."