Churchouse Letter
January 2016          by Peter Churchouse

A Billion Shades of Grey

A Mega-Trend at an Inflection Point

We are currently at a generational inflection point in Chinese demographics.
The government needs to shift the burden from the state to the individual.
We identify our best sector for you to profit.

China is one of the most rapidly aging countries in the world.

By 2030, China will have more elderly people than any other country in the world. It currently has a population of 120 million people over 65, and it is growing rapidly.

This aging shift will present huge challenges for China’s authorities. But it will provide mega opportunities for companies and investors who can tap into this unprecedented demand for services and products from the over 65s.

In the last edition of The Churchouse Letter, we showed how you can benefit from the global aging trend. In this issue, we focus specifically on this opportunity in China.

Here in Hong Kong, I see evidence of this opportunity on a daily basis. Let me share a simple example I witnessed first-hand 18 months ago.

I went to visit a friend recuperating at a hospital here in Hong Kong. The hospital, located right in the centre of a prime commercial district on Hong Kong Island, was at least 40-storeys high. Decked out in marble and designer furniture it was more five-star hotel than hospital. Only the admissions desk and army of white-suited staff suggested otherwise.

My friend was in was 500-square-feet room. It had all the things you would expect from a suite at the Four Seasons. It was royally appointed with high-definition TV, iPod, sound system, Wi-Fi, refrigerator, spacious bathroom, sofa, and coffee table.

Let me tell you, this is not cheap real estate. You would be looking at close to US$2 million to buy an apartment with these specifications in this location.

But the real surprise was the large numbers of people throughout the hospital speaking Mandarin, China's national language. The main language in Hong Kong is Cantonese.

This hotel, sorry, hospital was clearly serving a lot of Mainland Chinese. My visits to China lead me to un-derstand why. Many are not spring chickens. They are primarily middle aged or older.

OK, so the maternity wing was still doing grand business. Expectant mothers pouring into Hong Kong from China to have their babies has been a source of much public resentment in recent years. The Hong Kong Government began limiting public hospital maternity services to Mainland women in 2012. By that year, over a third of Hong Kong’s 92,000 births were to Mainland parents.

But this was no public hospital. It was a highly efficient private hospital serving a largely Mainland clientele. They were quite happy to pay big bucks for top quality medical care and services.

Hong Kong’s medical profession does extremely well.

Private hospital services in Hong Kong are amongst the most expensive in the world. They are rapacious! Something my family and I know only too well.

Why are people pouring into expensive Hong Kong to buy medical services? It’s because they are not available north of the border.

Even if they are available (at a price), there is a trust issue. Usually the lack of food safety standards makes the headlines in China. But these scandals carry over into many goods and services, including education, environment, infrastructure and healthcare.

“Chinese investigators say nearly 60 hospitals and pharmacies in north-eastern China have been using fake blood protein in patients' drips. Albumin, or plasma protein, is used to treat patients suffering from shock and burns, and during open-heart surgery. Experts suggest that the fake product could be life threatening for those already in a serious condition.” BBC, 2007

On top of safety concerns, the use of bribes and “extra” service payments is rife. Chinese doctors are poorly paid. This doesn’t help the situation.

Changing demographics in China is driving demand by folks from the mainland for healthcare and other services in Hong Kong and elsewhere. The medical and social care systems there cannot fulfill these changing needs and demands.

The demands of an aging population are amongst the biggest problems for China. They also provide the biggest opportunities.

In simple terms, China’s demographic dividend has gone. China’s staggering growth over the past 35 years was largely a product of its ability to harness the energies of a cheap, young and underemployed workforce. Hundreds of millions of new workers powered the world’s manufacturing engine.

But this is the end of the road for population-led, demographic-led economic growth.

China is starting to look increasingly like many devel-oped nations 30 or 40 years ago.

But there is one big difference.

China is getting old before it gets rich.

We are used to talking big numbers on most subjects when discussing China. With a population of 1.4 billion that is inevitable.

It’s not just the scale of the problem/opportunity that is so mind-boggling. It is also the pace of change.

As we showed last month, the developed world is in an aging phase. But China fits into that category more than most other emerging markets.

First, the basic causes of rapid aging in China are similar to those of the West. China enjoyed a baby boomer generation period of high fertility just like most countries in the West.

Second, life expectancy in China has risen markedly in the past 35 years during this mega growth phase. Life expectancy has risen from 40 years in 1950, to 68 years in 1981, and 74 years today.

And this number is heading higher.

Another influential factor on the aging population was the introduction of the highly contentious and brutal one child policy back in the late 1970’s.

Whilst the subsequent effect has been dramatic, you can clearly see in Figure 1 that by 1978 when the policy was introduced, China’s fertility rate had already collapsed.

Why? Because of Chairman Mao and specifically his Great Leap Forward of 1958-61.

In short, it was an ultimately disastrous communist economic and social campaign. But there was nothing “great” about it.

Estimates vary, but the famine it triggered is widely considered to be the deadliest in history. Some 30 million died. This represented roughly five percent of the population.

China's historical fertility rate from 1950-2010, showing the impact of the Great Leap Forward and the introduction of the One Child Policy.

The subsequent effects of three decades of social engineering on the country’s demographic structure have been profound.

Figure 2 shows the population distributions in 1950 and 2000, respectively, with a 2050 forecast included.

A population pyramid of China, showing 100 years of ageing.

With hundreds of millions of potential babies removed from the population, not only has China aged rapidly, it is set to reach a population peak in 2025 before starting to decline. By 2050 the population is forecast to be lower than it is today.

The Chinese government finally recognised the impending implications for the Chinese economy by abandoning the one-child policy in October of this year.

It might be a step in the right direction, but as my good friend and former Morgan Stanley Chief Asia economist Andy Xie commented, it’s “too little, too late”.

I’m inclined to agree with him. Although I’m not going to get into it now, I think people betting on a Chinese baby boom (infant formula stocks etc.) are looking at completely the wrong end of the age spectrum.

There’s not going to be any boom... just a ‘blip’ at best.

Getting back to China’s ageing population; let’s look at some basic data that shows the scale of what we’re talking about.

China’s total population has just about peaked at around 1.4 billion. By comparison, India’s population is expected to increase by 400 million in the period up to 2050. The U.S. population is expected to increase by close to 90 million.

The rate of growth of the over 65s population in China is 2-3 times that of other major developed world countries.

In the developed world, the percentage of over 65s in the population will grow by around 1.5 times. In China it will grow by almost 3 times, from around 8.3% of the population in 2010 to about 24% by 2050.

China’s over 65s number about 120 million today. That is expected to almost double in the next 15 years. By 2030, China will have more over 65s than any country in the world.

The median age is expected to rise by 10 years in China. A demographic change twice the pace of developed countries.

It is not just the size and growth of the Chinese elderly population. What the workforce will look like is equally critical.

The growth of the old-age dependency ratio in China is one of the highest in the world. This is the ratio of over 65s to working-age population aged 15-64.

Just take a look at Figure 3. This shows the historical and projected old-age dependency ratio. I believe it’s the simplest yet most powerful chart we include in this month’s edition.

China's Old Age Dependency Ratio is rising fast (1950-2050).

We are today at an inflection point with regards to the demographic structure in China.

From having nine working-age people for every elderly person, China is heading towards having just 2.6 working age people per old-age person. This is roughly where Japan is today.

BRICs working age population from 1950-2050 (India, Brazil, Russia, China).

China’s working age population has peaked. Now it is in decline.

An aging population is not unique to China. But China is not well equipped to deal with this right now.

Most other countries managed to get rich before they had to deal with the aging problem.

For smart companies and investors there are huge opportunities to fill the gaps. But we will need to see a lot of policy support for these opportunities to be captured in some areas.

China has not yet joined the rich world club. And even wealthy countries are struggling to provide adequate pensions and healthcare for their elderly. Just look at the U.S. state pension shortfall. This is the gap between benefits promised and funding available to state retirement systems. According to Pew Charitable Trusts research, this gap is close to US$1 trillion.

So how is China, a “middle of the middle-income” country, with a large and rapidly growing elderly population, going to cope?

Well, simply, it won’t. At least under its present social structure. And not without a lot of support from the private sector.

China’s traditional health and elderly care systems have collapsed with the breakdown of the commune system and development of a “market economy”.

The “Iron Rice-bowl” is broken.

Under fully-fledged Communist rule, communes looked after people in a “cradle-to-grave” regime. Your life was the property of the commune. But the commune and state provided all the basics of life: work, housing, food, education, healthcare, and care in old age.

Well, not any more. The commune has long since disappeared or morphed into a form of free enterprise. The social safety net that kept everyone together has unraveled. It does not exist today.

The services once provided by the commune are still needed, but are not provided by national state or local governments. Or at least not in the quantities needed. State-promoted insurance schemes have grown but don’t remotely cover the full costs of care needed.

In other words, there is a huge gap to fill...

Where the government steps back, the private sector can step in. And profit.

Let’s look at a few key areas...


To find out what ways Peter has discovered to take advantage of this unprecedented demographic shift in a market that's typically hard to access, subscribe to The Churchouse Letter today.

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