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An Aging China: Turning Adversity into Opportunity

Key Takeaways

  • China’s old-age population share is expected to double from 12.6% now to 26% in 2050, with total population likely peaking in the late 2020s then declining.
  • While China’s demographic transition clearly brings about new challenges, Citi analysts believe it also gives rise to immense opportunities, especially at the sector level.
  • From an equity strategy perspective, the aging population may lead to more divergent performance among sectors. In particular, Citi analysts believe healthcare, internet, consumer discretionary and insurance may benefit.

 

Features of an Aging China

  • Amid market volatilities, Citi analysts believe it is equally important to think about long-term trends in the post-pandemic world. “Slowly but unforgivingly altering the realm of the possible”, demographics matters to economic performance and social development, and hence investment opportunities and risks. China’s population aging is a trend that Citi analysts have identified as one of the top themes for Asia in the new decade.
  • China’s six-decade low population growth reported for 2019 has renewed concerns about a potential demographic crisis. It appears we are the inflection point of a great transition with the world’s largest population aging into unstoppable declines in the late 2020s.
  • Last year, China’s population crept past 1.4bn for the first time and remained the most populous in the world, followed by India with 1.37bn people. However, the population growth rate has trended down for more than three decades, dipping to 0.33% YoY in 2019, the lowest since the Great Famine between 1959 and 1961. This is also much lower than the world average at 1.08% YoY.
  • China is also growing old at an astonishingly rapid pace. The population aged 65 and older (i.e. “old-age” population) reached 176mn in 2019, ranking 8th among nations. The percentage of old-age population has been rising at an accelerating speed over the past decade, standing at 12.6% in 2019, well above the United Nation (UN) convention of 7% to define an aging society, and the world average at 9.1%. The UN forecasts that China’s old-age population may double to 366mn in 2050, with their share in the total population up to 26%.
  • Along with the rise of old-age population, people aged 80+ are also expected to more than quadruple from 26.6mn in 2020 to 115.3mn in 2050, representing the world’s largest “very old” population. Despite the extended healthy life expectancy, the prevalence of people who require daily care is expected to rise from 5.6% to 7.6% of the total population between 2010 and 2050.
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Ten Economic Implications of Aging

1.  China’s potential growth may not be what it used to be. China’s potential growth may slide to around 5.5% in 2021-2025 and further below 5% in 2026-2030. The spillover effects of China’s growth story may also weaken into the future.

2.  Industrial competitiveness: from labor costs to labor quality. Despite higher costs, improved labor productivity could allow it to compete via quality in the next wave of industrial prosperity. Rural-urban migration has slowed, but urbanization 2.0 is taking shape as China moves to help migrants settle down in cities and develop city clusters.

3.  The rise of robotic automation. China has been the world’s largest industrial robot market since 2013 and it is expected to continue leading in robot adoption and production in the next decade.

4.  Innovation to be more important than ever as China rebuilds its competitiveness, but it may have to rely more on domestic talents to drive the technological progress ahead. The market’s massive size and fast changing nature provide plenty of room for innovators to learn and rapidly scale up.

5.  The uphill challenge of reforming the retirement system. China’s pension system may be running out of money and is excessively fragmented. Structural reforms such as transferring state assets to retirement funds and liberalizing pension investment may accelerate, creating new opportunities for the pension industry.

6.  Preparing for better healthcare and aged care. More resources could be allocated to healthcare and aging-associated disease treatment. The wide demand-supply gap of quality long-term care could generate both opportunities and challenges for players in the field.

7.  The emerging silver economy is a golden opportunity. Along with aging is the rise of the older consumers with real spending power. Seniors’ market could expand from RMB4trn in 2014 to RMB106trn in 2050 (8% to 33% of GDP). Their demand for protection, healthcare, consumption and entertainment is likely to be too big to ignore.

8.  High savings rate and external surplus likely behind us. China’s savings are not as excessive as in the past, especially for households, and may decline further due to the demographic shift. A new normal may be for China to report low current account surpluses or even, from time to time, deficits.

9.  Industrial and property prices likely to lose some momentum. China’s shrinking as a society in the new decade may weigh on industrial prices, with mixed implications for inflation. Property prices may also enter into a new normal with less wild gains.

10.  Real interest rates and asset returns likely to lower permanently. The aging population may lead to a secular decline of real interest rates in China. All else equal, it is likely to put downward pressure on overall real returns on risk assets as well, despite the structural opportunities.

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Equity Strategy

China’s aging population could benefit the healthcare, internet, consumer discretionary and insurance sectors; while the sectors facing potentially lower demand growth are materials, energy, real estate, utility and auto.

  • Consumer discretionary: With senior consumers’ stronger health awareness and preference for products with good quality and superior brand names, a preference for more premium products in multiple consumer sectors may be accelerated as seniors pursue a high-quality elderly lifestyle. Dairy products, personal care lines, health supplements, sportswear and tourism may benefit.
  • Healthcare: An aging population and surge in chronic diseases, coupled with higher personal incomes mean greater demand for more and better healthcare. Citi analysts favor large pharmaceutical names with a proven track record, deep quality pipeline and strong product portfolio represented by oncology and chronic diseases drugs. Internet healthcare is also likely to play a key role in the next decade and enjoys tailwinds from policy reforms.
  • Internet: The share of internet users in China aged 50+/60+ has risen from 5.7%/1.5% in 2008 to 16.9%/6.7% in 2019. Technology firms have released senior-friendly version of apps and leveraging the power of older KOLs (key opinion leaders) to find an entry point into seniors’ market.
  • Insurance: Insurers have moved to capture opportunities by offering pension and long-term care insurance, setting up specialized pension companies and developing retirement communities for high-end retirees.

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