This article first appeared in October 2007 in The Irish Times and is reproduced here with their kind permission.
With a rapidly aging population will China seem such a good investment in 15 years?
Richard Whelan says the demographic challenges facing China are a fact of life already for France, Germany and Japan.
China is the investment hotspot for business worldwide, yet recent demographic research shows unexpected dangers and unforeseen trends that challenge received notions of a market offering great opportunities.
As most investment time horizons stretch out over decades, an understanding of likely demographic developments impacting on them is essential. The world at large faces a rapidly ageing population, a challenge unlike any we have seen before, because of a decrease in fertility rates and an increase in life expectancy, happening at the same time. Ageing populations will lead to a slowdown in economic growth and a need for increasing government expenditures on retirement, healthcare and related costs.
China, frequently seen as the investment location of choice, provides the most stark illustration of the demographic challenge. In simple terms, to maintain a stable population long-term, women must bear an average of 2.1 children per lifetime.
Less than that leads – over the long-term – to a decline in population. While many know that Europe has an ageing, declining population now, most have missed the fact that so has China. The current fertility rate in China is 1.7 per woman, compared to 2.04 in the US and 3.07 in India. On the other side of the equation, China’s life expectancy has grown dramatically over the past 50 years, from 40.8 years in 1950-1955 to 71.5 years in 2000-2005.
Consequently, China’s population has started to age rapidly and that process is accelerating.
In 1950, 4.5 per cent of the population of China was 65 or older. By 2000, that percentage had risen to 6.8 per cent. It is estimated that by 2025, 13.4 per cent of the population will be 65 or older, while by 2050, that percentage will be 23.6 per cent.
By 2050, China’s average age is expected to be nearly 45, one of the oldest in the world. Today, China has about 100 million people at, or over, the age of 65. In 2050, it will have about 330 million.
These developments will begin to have a significant impact in China in approximately 10 to 15 years’ time, when its large post war baby boom generation reaches retirement age.
China will then, uniquely, become the first great power to grow old before it becomes an advanced industrial state, and so, it will not have the “infrastructure” and savings safety net to support its ageing population.
In addition, as people retire, the workforce shrinks. China’s working age population (age 15-64) peaks in 2015 and then steadily declines.
The negative impact of these two developments impacts on the “support ratio” of working age adults per citizens aged 65 or over. That support ratio was almost 14 in 1950, 10 in 2000 and is expected to decline to 2.6 in 2050. So, while a pensioner was “supported” by 14 workers in 1950, by 2050 that support will decline to 2.6 workers. This will put significant economic financial, and social pressure on China.
In the absence of social security, the family in China provide for the elderly. The one child policy, has led to the growing “4-2-1” problem, where a child is responsible for 2 parents and 4 grandparents.
Starting in 10-15 years, Chinese leaders will either have to help fund the retirement of a significantly growing percentage of the population, or allow growing levels of poverty and unrest.
One expert, Nicholas Eberstadt, has described the likely outcome of these developments as having “the makings of a slow motion humanitarian tragedy”.
On top of this, the unnatural gender imbalance in China also threatens its political stability.
Recent statistics show that China’s sex ratio at birth is 119 boys to every 100 girls, with the international norm being about 105 boys to 100 girls. This imbalance will cause major shocks in the marriage market, and serious problems in a society where tens of millions of men cannot find a marriage partner. A similar situation arose in the 19th century in northern China. That led to massive criminality, significant instability, and young men forming criminal gangs and eventually starting the Nien Rebellion.
An expert on male overpopulation in Asia, Valerie Hudson of Brigham Young University, has suggested that “in 2020, it may seem to China that it would be worth it to have a very bloody battle in which a lot of their young men could die in some glorious cause”.
Money cannot deal with all these problems, but it can certainly help. The population of Taiwan is about 23 million, yet China’s GDP is only about seven times that of Taiwan, despite its population of 1.3 billion.
These demographic issues are therefore going to present significant difficulties to China, even allowing for possible solutions, such as increased productivity, increases in taxation (particularly of the 1 per cent of the population who control 60 per cent of the country’s wealth), deficit spending and increasing fertility rates. To investors, some of these problems may generate business opportunities.
This analysis would suggest that those opportunities and the other opportunities already available should be evaluated in the context of a very high level of risk and the increasing possibility of significant instability, particularly over the next decade and a half. In demographic terms, at least, India is in a more attractive position.
By 2050, it will have the largest population in the world at 1.6 billion (compared to China’s 1.4 billion) and while many of the problems facing China will also hit India, they will do so at a later date than it.
The demographic challenges facing China are a fact of life already for France, Germany and Japan. In 2004, Japan and Germany indexed state benefits to their respective support ratios. As the ratio of workers to dependents declines, social security benefits automatically decrease.
The widely held belief that China and/or the EU will “match” the US militarily and/or economically over the next decade or so is highly unlikely. Demographics alone will prevent this. The US is currently the “youngest” of the G8 countries because it has the highest fertility and immigration rates. With its growing population and more positive worker/dependent ratio, it is much better placed to deal with these issues.
It also uses immigration to keep its population young and its support ratio low. This puts the generally negative view of immigration in Europe in general and Ireland in particular, in an interesting context.
Making significant economic, political or business decisions extending over the next 10 or 20 years without fully understanding the demographic changes we are all going through is an exercise in self-delusion. The world you really live in is not the world you currently perceive.