Is China's Future Japan's Present?

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On New Year's day, Bloomberg posted an article with just three sentences. It was probably overlooked by most of the world. In short, Japan's population is shrinking because of low birth rates and an aging population. For investors who see China as the next world leader, Japan should be a cautionary tale.

What's the Fuss?
Bloomberg writer Masumi Suga references the Japanese Ministry of Health as stating that Japan's population declined by 212,000 in 2012. This was “the biggest drop on record” and the sixth consecutive year in which the population fell. Births also fell to a record low, totaling 1.03 million. This means that more population declines are on the way.

So what? They say that demographics is destiny. It's pretty simple if you think about it. If there are more people, then you need more stuff to support the new people. That means more food, more homes, more cars, more toys, etc. In order to come up with the additional “stuff,” more people will be needed to produce and sell it. It's kind of a virtuous cycle. When things go in the other direction, however, it's more like the spiral of a toilet bowl.

The Lesson from Japan Back in the 1970s and 1980s, Japan was an industrial powerhouse that everyone thought would eventually take over the world. Toyota (TM), Sony (SNE), and a collection of other major firms seemed headed to destroy any number of major U.S. corporations.

You couldn't go more than a few months without a new movie about evil Japanese companies either destroying American businesses or, for the science fiction fans, trying to take over and/or destroy the world. Flash forward to today and the fears that spawned those movies seem not only misguided, but downright silly (OK, some of the movies were silly when they were made, too.)

There's a good reason why Japan has struggled for so long and it's intimately tied to its population. Japan is aging, and the elderly are taking more from the economy than they are adding to it. If there were large numbers of children coming up, then there would be no problem. But there aren't. Throw in the so-called “lost generation” who simply couldn't find work because their parents were still in the work force, and it only made things worse. After all, unemployed people tend not to get married and have kids.

Who Else Does this Sound Like?
Japan sounds frighteningly like the United States, to some degree, though the United States has benefited for years from its relatively lenient immigration policies. That said, the economic downturn has started to change that. An aging population and low employment also sounds like a lot of Europe.

Many counties in the “old world” are demographic basket cases that can't even increase their birth rates by paying women to have kids. However, it also sounds like another Asian country that people think is on schedule to take over the world. Namely, China.

While some might call that crazy, the country is still suffering under its ill-fated one-child policy. You need at least 2.1 births per family to keep a population stable. If you limit your population to one child per family, it shrinks. No questions asked.

This doesn't even factor in the accusations of infanticide, since boys are more prized than girls. So, China's population seems set to age and birth rates look set to fall, compounded by a disproportionally small number of females.

If it's so Bad, Why isn't it Showing Up Now?
The real story in China isn't one of population growth, it's one of industrialization. Yes, there are lots and lots of people in China. Continued growth isn't the biggest issue benefiting the country, though. It's the move from a largely agrarian economy to an industrialized one.

The same shift took place in the United States and other industrialized nations around the world. So, while the country continues its steady march toward developed status, things are going to be fine. That shift should last a long time yet.

Companies like Yum! Brands (NYSE: YUM), which is aggressively expanding the presence of its restaurants in China, including the purchase of Chinese eateries, are likely to see continued growth. More people with money generally means more people eating out. Of course industry giant McDonald's (NYSE: MCD) is also moving into China, which it highlights as a growth spot. However, management has also made specific note of Japan as being a key drag on performance. That's a worrisome connection.

Chinese companies like China Mobile (NYSE: CHL), a provider of cellular phone service in China and Hong Kong, will also continue to be desirable investments. This telecom giant is among the largest cell providers in the world, and will continue to see more subscribers as more and more people in its markets can afford to use its technology. The shift to increased data usage will also help spur results.

Even Dow-30 member Coca-Cola (NYSE: KO) and recently created Mondelez International (NASDAQ: MDLZ) will continue to benefit as people in China increase their consumption of prepackaged beverages and foods. This is a trend that also goes along with industrialization and an increasing middle class.

So Why Worry?
A lot can change in 20 years, just ask Japan. While once expected to take over the world, Japan has been little more than a fading nation for two decades. Moreover, it doesn't look like it's ready to make a turnaround any time soon.

Once the industrialization story in China is over, investors should be ready to move on—quick. That may be twenty years away, or it may be less (or longer), but the story will end at some point, just like every other investing story has. You may not need to keep it at the front of your mind, but it should be an item stored in the back of it.


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ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and McDonald's. The Motley Fool owns shares of China Mobile and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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