This Is The End of China

Happy Saturday everybody. Welcome to another episode of China Update where we discuss leading political, economic and geostrategic analysis on the world's number two economy. My name is Tony, this is a special extra Saturday episode of China Update. My apologies for interrupting your rest over the weekend, but we have a huge story we need to cover, so let's jump in. And first up, this week saw the publication of a devastating report from highly respected US-based think tank Rhodium Group. If accurate, the report suggests the end of China as we know it. Indeed, according to the report, the collapse has already begun as the nation's demographic crash plunges the nation into a painful structural decline and multiple crises. The report is called China's Demographic Future is Now. We estimate China will lose nearly 60 million people in the next decade, roughly equivalent to the population of France. The impact on household consumption is obvious, but the larger problem for Beijing may be the hit to social security funds, written by Alan Fung, associate director of Rhodium Group's China markets research team. To begin today, we're going to unpack the findings of this report. The following charts are also provided by Rhodium. The report argues that China's demographic crisis is no longer a distant risk. It is unfolding in real time with increasingly serious implications for the country's economic model, fiscal stability, and long-term growth. The latest data paints a stark picture. China recorded just 7.92 million births in 2025, less than half the level seen a decade earlier and comparable to figures from the 1930s, despite a population more than double that era. At the same time, deaths are rising steadily as the country ages. The result is a rapidly accelerating population decline. Conservative estimates, based on Beijing's own numbers, suggest China could lose nearly 60 million people over the next decade, with annual population contraction widening to as much as 7.6 million people by 2035. That's every year. Now, there is a lot of sensationalism about China's so-called collapse, but there is no escaping it or sugarcoating it here. This level of population decline can only be described as a collapse. This is not sensationalism or clickbait claims. Losing almost a New York City's worth of people per year within the decade is nothing less than a collapse. To make things worse for China too, every one of these collapse trends, population, fiscal, and economic, was exacerbated and accelerated by COVID-19. Not just the pandemic itself, but Beijing's policy decision to implement years of zero COVID measures, where medical tents and hazmat suits were the common sight in the country. Now, this is not just simply a demographic issue. It is a structural economic shock. At the core of the collapse is fertility. Even after the end of the one-child policy and the introduction of pronatalist incentives, birth rates continue to fall. The causes are deeply embedded. Later marriages, fewer marriages overall, rising education levels, economic uncertainty, and the shift toward less stable employment in the gig economy. Social trends among younger generations, ranging from disengagement to declining interest in family formation, are reinforcing the decline, as seen in countries like Japan and South Korea, countries that got rich before these trends kicked in. Once fertility falls to these levels, policy interventions tend to slow rather than reverse the trend. The consequences for China's growth model are already visible. Slower population growth directly weakens household consumption, long a missing pillar in China's economy. Income growth is decelerating, employment conditions are softening, and consumer demand remains subdued. What was once described as a grey rhino, a visible but underappreciated risk, is now actively constraining economic momentum. More troubling, however, is the fiscal dimension. China's social security system is coming under mounting strain. In 2025 alone, the government injected 2.9 trillion yuan to support the system, over 10% of total budget spending. Without these transfers, the system would already be running a significant deficit. The pension fund, in particular, is structurally imbalanced, with expenditures far exceeding contributions. While this is a common issue across the developed world, in China it's much worse. The situation is on steroids. With even very modest social spending, for example, rural pensions can be as low as two US dollars a day, proving difficult to sustain the fiscally devastated local governments, and the situation is getting worse at an accelerating pace. The underlying issue is the rapidly deteriorating dependency ratio. In 2024, there were roughly 4.4 working-age individuals supporting each retiree. By 2035, that figure is projected to fall to just 2.8. This means fewer workers are funding the retirement of a growing population, creating a widening fiscal gap that will require either higher taxes, reduced benefits, or increased government borrowing. Regional dynamics add another layer of complexity. China's most economically productive coastal provinces are now experiencing natural population declines, with growth sustained only through internal migration. This undermines future productivity and consumption potential in precisely the regions that have driven China's economic rise. Meanwhile, traditional industrial regions in the northeast continue to suffer from both low birth rates and economic stagnation. The structural risks are clear, but the potential worst-case scenarios are even more concerning. In a severe scenario, it is highly likely that China could enter a prolonged period of Japan-style stagnation, but at much lower income levels. Weak consumption, deflationary pressures, and declining investment could become entrenched, limiting the country's ability to transition to a more balanced consumption-driven economy. At the same time, mounting pension liabilities could crowd out other government spending, including on infrastructure, innovation, and defense. Or, as we'll discuss shortly, the government will invest in the latter, and hundreds of millions of older folks will just live in poverty. A more acute risk is a fiscal squeeze. If population decline accelerates beyond official projections, something the current data suggests is very plausible, the social security system could face rapid depletion, forcing Beijing into difficult policy choices. Large-scale fiscal transfers may become unsustainable, particularly as economic growth slows. And of course, something like this would have profound social consequences, including a high risk of dissatisfaction and even political crisis. There is also a labor market dimension. A shrinking and aging workforce could constrain productivity gains, even as China attempts to move up the value chain in advanced manufacturing and technology. While automation and artificial intelligence may offset some of these pressures, they also introduce new uncertainties around employment and income stability, factors already contributing to lower birth rates. Now, demographic and economic collapse doesn't necessarily mean political fragmentation or a defanged China on the world stage. In a Leninist security state, Beijing could choose to prioritize an ambitious military and geopolitical agenda over social support for hundreds of millions. The political base of this state being 50 to 100 million lucky citizens in the wealthy coastal regions, where China continues to see progress in advanced technology, while the rest of the country is mired in stagnation and decline. Plus, of course, there is also the fact that insecure political elite are typically much more dangerous than a confident one. Now, this is a lot to digest, and of course this is just one report, but regular viewers of China Update will see many familiar trends in this report. Let me know in the comments below what you think of some of the conclusions and some of the risks identified in this Rodium report. Do you agree that China is already in a stage of collapse, or do you think it can still turn things around? Let me know in the comments below. Whatever happens, we will continue watching this space very closely. Now, I believe this channel is the best resource on YouTube to follow China, with a focus on grounded and sober analysis, not sensationalism or unfounded rumors. If you're looking for that sort of resource to follow China, consider subscribing to China Update at the bell notification icon. It would be wonderful to have you part of the China Update community here, as we together follow this incredibly consequential and important country in this new uncertain era. And Patreon and Buy Me A Coffee links are in the description for anyone who wants to go the extra mile and help keep China Update financially sustainable. For everyone who supports the channel, thank you so much. Next up, Taiwan President William Lai Ching-dao this week was forced to cancel a planned visit to Eswatini after several African nations denied his aircraft permission to use their airspace, an unusual move that Taipei says was driven by pressure from Beijing. According to Taiwanese officials this week, Seychelles, Mauritius and Madagascar abruptly revoked previously granted overflight permissions without warning. Taiwan's presidential office said the decisions were the result of, quote, intense pressure, end quote, from China, including potential economic coercion. Officials in Taipei suggested Beijing may have threatened measures such as withdrawing debt relief or imposing other financial penalties to secure compliance. While China has not publicly commented on the specific incident, it has long opposed international recognition or engagement with Taiwan, which it views as a breakaway province. If these accusations are correct, it would be another concerning development and more evidence of what some analysts have called neocolonialism. Essentially, Beijing can use economic and political pressure to tell African countries what to do, including whether they can grant others use of their airspace. The episode also highlights the expanding scope of geopolitical influence in global aviation and diplomacy. Analysts warn that if countries can be pressured into denying basic airspace access, it raises broader concerns about sovereignty and the use of economic leverage as a foreign policy tool. For Taiwan, the cancellation is another reminder of the growing challenges it faces in maintaining international engagement amid rising cross-strait tensions. Next up, efforts to revive trade talks between the European Union and China are facing fresh headwinds with Alina Veltunen, the Minister of Foreign Affairs for Finland, warning that Beijing's ties with Moscow could block any future agreement. In remarks from an interview this week with Hong Kong-based South China Morning Post, Veltunen said China's relationship with Russia should be a, quote, disqualifying factor, end quote, in launching negotiations on a free trade deal with the EU. Her stance effectively positions Finland as a potential veto player, as any such agreement would require unanimous backing from all 27 EU member states. The comments come as Beijing has floated the idea of restarting trade or investment discussions with Europe. Some European leaders, including Frederick Mertz, have suggested that a deal could be possible in the future. However, political realities appear to be moving in the opposite direction. At the core of the tension is China's stance on Russia's war in Ukraine. European officials have grown increasingly frustrated with Beijing's refusal to condemn Moscow, as well as concerns that Chinese firms may be supplying dual-use goods that could support Russia's military. Veltunen argued that China is benefiting economically from the conflict, describing Russia as a, quote, junior partner, end quote, providing discounted resources. These geopolitical concerns are compounding existing trade disputes. A long-negotiated EU-China investment agreement has been effectively frozen since 2021, following mutual sanctions over human rights issues. Meanwhile, European leaders continue to raise concerns about Chinese industrial subsidies and overcapacity, which they argue distort global markets. Despite growing unease, the EU remains divided on how to approach China. Member states hold differing economic interests and strategic priorities, making it difficult to form a unified policy. To give one example, the French do not want their market flooded by Chinese cars. The Germans want to sell their cars to China. Veltunen acknowledged these divisions, but emphasized that a coherent European stance would strengthen the bloc's position. For now, the prospect of a comprehensive EU-China trade deal appears increasingly remote, as geopolitical tensions continue to overshadow economic cooperation. And finally for today, we move to US-China tensions generally, and specifically how the conflict with Iran is straining the relationship. The United States has intensified its economic pressure campaign against Iran by sanctioning a major Chinese oil refiner, Hongli Petrochemical, highlighting the increasingly global reach of energy-linked tensions. The sanctions, imposed by the U.S. Department of the Treasury's Office of Foreign Asset Control, OFAC, target Hongli's large refining complex in Dalian province in the northeast. With a processing capacity of roughly 400,000 barrels per day, the facility is one of the largest in China's private refining sector, often referred to as a teapot refiner, which together account for about 20% of the country's total capacity. According to U.S. officials, Hongli has been a significant purchaser of Iranian crude oil, helping generate billions of dollars in revenue for Tehran. Washington argues that such transactions indirectly support Iran's military and broader strategic activities, making the refinery a key link in what it describes as a sanctions evasion network. The move extends well beyond a single company. OFAC also blacklisted around 40 shipping firms and tankers tied to Iran's so-called Shadow Fleet, a network used to covertly transport oil. These vessels frequently disable tracking systems and conduct ship-to-ship transfers, often in waters near Malaysia, to obscure the origin of cargo. Iranian crude is then rebranded, allowing it to enter global markets, particularly China, without appearing in official trade data. China remains the largest buyer of Iranian oil, accounting for an estimated 80 to 90 percent of exports prior to the recent escalation in the Middle East. While Beijing's official data shows no direct imports, the widespread use of intermediaries has enabled the trade to continue largely out of sight. The sanctions come at a critical moment, as Washington explores potential diplomatic engagement with Tehran while simultaneously tightening economic pressure. As we saw earlier this week, too, it seems that some seized vessels had come from China. Treasury Secretary Scott Besant signaled that enforcement will expand, warning that any entity facilitating Iranian oil flows risks exposure to U.S. penalties, including secondary sanctions targeting foreign firms. At the same time, tensions in the Strait of Hormuz, a vital artery for global energy supply, have disrupted shipping flows, contributing to volatility in oil and gas markets. Reduced transit levels have heightened concerns about supply constraints and rising prices. The timing also adds complexity to U.S.-China relations, with the sanctions arriving ahead of a planned meeting between U.S. President Donald Trump and General Secretary Xi Jinping. Beijing has previously criticized these measures, arguing they undermine global trade norms and harm legitimate business interests. The action reflects a shift toward more aggressive economic statecraft. More broadly, the move shows that the U.S. is losing patience with China, which the U.S. president accused this week of, quote, giving gifts, end quote, to the Iranians. The fact they're willing to sanction major oil players in China suggests they are not concerned about the economic blowback. We will continue to follow this space closely in the coming days to see how China reacts and whether the U.S. hits Chinese entities with more sanctions. Okay, that is today's extra Saturday episode of China Update. Thank you so much, everybody, for watching. Have a good Saturday, have a restful weekend, and I hope to see you for a new week of updates on Monday.