China’s big demographic shift
I have been conducting some research on demographics, and here is a chart that should raise concerns among, and even scare, Chinese policymakers due to its implications for the country’s development process.
This chart shows the ratio of the population aged 65 years and over per 100 aged 15-64. That is to say the elderly that people of working age have to care for. In China, this ratio is expected to rise from 17 in 2020 to 32 in 2035 and 43.6 in 2050. In other words, China is getting old, fast.
Over the past decades, China’s medical advances, better nutrition and an improvement in quality of life have led to a rise in longevity, a trend expected to continue going forward. All of which are great news.
The problem is that the country’s fertility rate, which dropped sharply as a result of the now abolished ‘One-Child’ policy, remains below what the UN has determined to be sufficient to sustain population level, i.e. the ‘replacement fertility rate’.
Even though partly explained by fear of contagion of Covid-19 in hospitals, the recent news that China’s birth-rate dropped about 15% in 2020 suggests that, despite authorities’ best efforts, the fertility rate continues facing downward pressures. And this is in great part due to financial considerations, including opportunity costs of having and raising children for young couples – e.g. maintaining their current lifestyles, pursuing their professional and educational goals, etc.
With less births, a shrinking workforce and an increasingly older population, Chinese families will face rising pressures to care for their elderly. But rapidly ageing societies are certainly not a new trend. It is happening in Europe, and of course also in Asia (e.g. Japan, Korea, Singapore).
China’s ageing process, however, is especially disruptive for a number of reasons. Let me point out four:
- China is getting old before getting rich. Despite experiencing fast-paced growth over the past decades, owing to its sizeable population China’s GDP/capita has remained below the world’s average for the most part of its transition to an aged society. Developed economies have, in comparison, grown richer at a faster pace than getting old. Most have experienced longer transitions to an aged society, such the US. While others, such as Japan and South Korea, have aged at a faster pace than China but have also seen their GDP/capita levels skyrocket
- China’s traditional family structure is changing. The average household size, already relatively small due to the ‘One-Child’ policy, has continued shrinking driven by increasing divorces and unwillingness to have children. This has weakened the informal system upon which elderly care depended, making it increasingly difficult for families to devote time, energy and money to provide and care for their elderly. In many cases this represents an opportunity cost that has to be weighed against other choices: against migrating to cities to pursue better economic prospects for rural residents; against developing their careers and pursuing their own interests for urban residents; and against caring for their children for young couples
- China’s urban-rural disparity adds further complexity. Rural areas have to contend with higher elder dependency ratios, smaller household sizes and lower disposable income per capita levels. Young breadwinners prefer to work in cities
- Increasing pension pressures. Changes in China’s demographic structure mean that, on average, there is less money being generated per capita to contribute to the national pension system. China is seeing about 10 million new pensioners each year, all while at the same time its working-age population is shrinking by 3-4 million per year
In short, China is experiencing one of the fastest shifts to an aged society the world has ever seen with a GDP/capita that is below the global average. This raises concerns about increasing healthcare costs, the sustainability of pension systems, and the availability of care services for the elderly.
On the positive side, this presents an enormous opportunity for businesses. Based on UN data, Chinese elderly population is expected to more than double in size from 2020 to reach 366 million in 2050, which means that China will become one of the largest eldercare markets in the world. In fact, research by the National Working Commission on Ageing suggest that this market will rise from almost RMB 4 trillion in 2020 to RMB (here) to RMB 106 trillion in 2050 (here).
Besides medical devices and pharmaceutical products, some of the areas where I think multinationals will see increasing opportunities are:
- F&B: manufacturing and selling products and complements designed specifically for the dietary needs of the elderly
- Delivery of care services: contributing expertise and best practices in the operation and administration of eldercare facilities;
- Education: training local talent according to international standards and best practices; and develop curricula in cooperation with local universities;
- Technology: help develop and incorporate digital and innovative solutions, such as IoT wearable devices with SOS alarms, remote care and ‘smart’ homes; automation technologies to offset the decrease in available workforce for manufacturing;
- Financial services: help develop China’s commercial insurance and pension system via asset and wealth management products to help Chinese save for their retirement; expand financing channels for elderly care through innovative solutions like REIT; and
- Construction and real estate: design, construction and retrofitting of facilities to make them ‘elderly-friendly’.
Having said this, the question remains whether China will be able to prevent this demographic shift from impacting its long-term growth aspirations. To borrow a passage from an article by The Economist: “as Ren Zeping, a prominent economist, tartly noted in a recent report, the median age in China in 2050 will be nearly 50, compared with 42 in America and just 38 in India. That, he wrote, raised a question: ‘Can we rely on this kind of demographic structure to achieve national rejuvenation?” (See here.)