China’s census indicates demographic slowdow

China’s census indicates demographic slowdown

Recent data from China’s population census earlier this month confirmed a challenging reality for the country – a slowing population growth and a rapidly ageing society. This has led to a major policy shift by the Chinese government to lift caps on child births, allowing Chinese couples to have up to three children, as the government ramps up pre-emptive efforts to counter economic headwinds from a demographic slowdown.

Although the recent census revealed China’s population grew over 5% between 2010 and 2020, there are increasing concerns that a shrinking working age population and declining birth rate could dampen the long-term growth prospects of the Chinese economy.

China’s working population - population aged between 15-64 - declined from 999 million to 968 million over the past decade, causing the old age dependency ratio to rise from 11% to 20% between 2010-2020. UN estimates suggest that China’s population aged 65 or above would make up 25% of China’s total population as early as 2050.¹

In addition, Chinese mothers gave birth to just 12 million babies last year, an 18% decline in fertility rate when compared to 2019, bringing birth rates to a near six decades low. On the other hand, urbanization picked up significantly, rising +3.3% YoY in 2020 relative to the +1.2% per annum gain between 2010-2019.

If left unattended, stagnating population growth and increased old age dependency could cause a contraction in labor supply and diminish wealth creation potential.

Policy and reform will play a key role

The lifting of childbirth caps signals strong intentions from the Chinese government to combat demographic headwinds, but it’s likely that further policy support will be needed. A survey conducted last year indicated that Chinese women were willing to have just 1.8 children on average, below the 2.1 replacement level needed for a stable population.²

Other initiatives such as the proposed postponement of retirement age, the development of the 3rd pillar of China’s pensions system and elevating labor productivity by increasing R&D will play an important role in ensuring China adapts to the potential stagnation of population growth.

Investment Implications

Slowing demographics and an ageing population represents both a challenge and an opportunity for the investors within China. As the growth in the size of the workforce slows, productivity will need to be increased in order to compensate. High growth and technology companies that are leading the way towards a more digitized economy are expected to benefit. As of the end of 2020, there are over 989 million Chinese people who have access to the internet – which provides a treasure-trove of data for companies looking at consumer habits and tastes in a rapidly growing middle class.      

For China’s real estate market, slowing population growth is a long-term structural headwind. The census data revealed that first-hand housing sales peaked in 2017, due to the impact of the 2nd Child Policy. The declining trend of household formations, specifically the number of marriages per year – is also on the decline. This may lead to a fall in property demand.

While the upcoming Hukou reforms could drive further urbanization in top-tier cities, this simply moves housing demand around internally without generating new demand. This could further inflate property prices and make housing unaffordable in big cities, worsening regional inequality.

In the past, China’s property market was supported by government policy and favorable demographics, but the winds have now changed. China’s April real estate investment growth slowed to about 21% year over year, 4% lower than the prior three months.

On the other hand, a growing silver generation creates new opportunities for goods and services catering to an ageing population. It’s likely that spending and investments on assisted living and health care should rise with an ageing population, benefiting pharmaceuticals, providers of medical devices, and internet health care companies.   

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

^1 https://www.oecd.org/employment/leed/oecd-china-report-final.pdf
^2 https://www.scmp.com/news/china/politics/article/3135476/china-adopt-three-child-policy-cope-ageing-population

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