Portfolio Manager May Ling Wee discusses China’s challenges and responses to an aging population and what this means for investors.

Key Takeaways

• China is growing more slowly and aging more quickly than expected, which creates issues such as a shrinking workforce, an underfunded government pension and lower savings ratio.
• However, an aging population leads to opportunities in health care, financial services, tourism and leisure, as well as automation.
• China hopes to address these demographic challenges with its urbanization drive and dual economic policy.

China’s 2020 National Population Census published in May confirmed that its population is growing more slowly and aging more quickly than expected. This brings forward the likely peak of China’s population, possibly in 2025 rather than the end of the decade, if China’s new three-child policy, immigration (unlikely in the near term) and other policies do not raise the current birth rate. China’s young and working age population decline versus growth in the elderly cohort brings challenges, among them an underfunded government pension and lower savings ratio.

Implications for Investors

From an investment perspective, China’s changing demographics present broad opportunities. This generation of retirees is likely to live for longer, driving the need for financial services such as insurance, as there are more assets to protect and preserve for an intergenerational transfer of wealth. Wealth management should see stronger growth given increased life expectancy will create the need for additional funding to support an extended retirement. With a lot of Chinese wealth tied up today in the real estate markets, opportunities exist for a continued diversification of household assets into other non-real estate investments that insurers and wealth management providers can address. In health care provision, service providers such as hospitals, providers of chronic disease management and medical device makers should continue to grow as China rolls out more health care infrastructure to provide for an aging population. COVID‑19 has also been an additional impetus to build more hospitals in China’s larger cities.

Businesses that cater to China’s generation of baby boomers, born in the 1960s, should prosper as this is the largest population cohort born in a single decade. This group is better educated, has accumulated more wealth due to the modernization and liberalization of China’s economy and has benefited from globalization. The baby boomers are more likely to have a higher propensity to spend as many can meet the basic needs of housing and medical expenses compared to previous generations of retirees.

While some service providers will do well if they can provide the right products and services to this generation of retirees, others will look to capitalize on investments that need to be made in automation due to a shrinking working age population and higher resultant wages. Sectors such as factory automation and robotics should see strong longer-term demand for their products.

Countermeasures

China is aging before getting rich. Its current share of the elderly population is similar to that of Japan in 1992 and South Korea in 2015 but with relatively lower gross domestic product (GDP) per capita than the two countries at the time. A shrinking working age population will make China a less attractive destination for foreign direct investment flows as labor costs rise. But China has been investing in human capital, with its young generation and current workforce much better educated than previous generations; it continues to produce the largest number of science, technology, engineering and mathematics (STEM) graduates of any single country. While China has lost its cost advantage in low-skilled labor, it now boasts a pool of higher value, skilled workers, which many southeast Asian economies cannot provide in the same numbers.

Meanwhile, the urbanization target of 65% by 2025 is looking achievable, the urbanization drive has created 19 city clusters. China’s rising people mobility, not only from rural-to-urban but also urban-to-urban will likely continue to be a driver of economic growth. The government has encouraged the move to a “dual circulation” economic policy of ensuring security in its supply chains in higher value and emerging industries like technology by upgrading investments and promoting strong consumption. At the same time, being a participant in global trade and a recipient of foreign direct investments and technology, should leave China well positioned to sustain growth and help counter the effects of its shrinking labor force and aging population.