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China
How demographic challenges are shaping the China investment
Andrew Lee
Investment Director
KEY TAKEAWAYS
  • China’s “common prosperity” agenda is poised to dominate investor attention as the country attempts to balance growth, social wellbeing and environmental sustainability
  • Further regulatory reforms could be on the cards as China tackles the “three mountains” of property, education and health car
  • Structural shifts in China’s economic and regulatory makeup could generate investment opportunities across diverse sectors and industries

China’s once-in-a-decade census1revealed some interesting demographic issues. The country has 264 million people aged 60 and above, which equates to 18.7% of the population, considerably higher than 13% in 2010. The 12 million births recorded in 2020 were the lowest since 1961. In addition, the working population has declined from 70% to 63% over the past decade. While rising living costs, unaffordable property, and uncertain career paths were often cited by young adults as major reasons for delaying parenthood or limiting the size of their families, the bigger elephant in the room is a rapidly rising dependency rate.


So how does a surging dependency rate impact demographics? Let’s think of a scenario. Imagine being one half of an average married couple in China with a monthly disposable income of RMB6,7262(US$1,056). Yet you are living in Shanghai, the world’s fourth-most expensive residential property market3 , with property prices standing at RMB36,826 (US$5,779) per square metre4 . You also have to take care of four aging parents as well as three young children – the number allowed under China’s family planning policy – in a society with an ultra-competitive academic system. Life can feel rather daunting, even unbearable.


China’s aging and increasingly reliant population

Note: 1980 to 2020 data were from the National Bureau of Statistics of China. * Estimates by the Office of the National Working Commission on Aging, shown for illustrative purposes only

Why should this concern investors? For starters, demographics are a major driver behind recent regulatory reforms targeting education, health care and property. These three sectors are known as the “three mountains” that Beijing aims to overcome to take pressure off households, solve its demographic challenges and achieve “common prosperity”, an overarching vision that incorporates quality growth, social wellbeing and environmental sustainability.


Despite the scale and complexity of China’s demographic issues, the country’s unique governance and policy system has proven efficient when it comes to taking action. Examples include reforming the after-school tutoring system (banning after-school tutoring activities during weekends and holidays), drastic cuts in generic drug and medical device prices, as well as curbing speculative activity in the property sector to keep real estate prices in check.


While a degree of regulatory overhaul would likely create complexities in China’s investment story going forward, the country’s commitment to solving its demographic deadlock remains strong and future policies will likely revolve around this agenda.


2. Regulatory reforms could be here to stay


Even though the “three mountains” are obvious candidates to receive further regulatory attention, investors should keep in mind that other sectors could also be targeted.


In the technology space, industry heavyweights such as Alibaba, Pinduoduo, Meituan and Tencent were hit with multiple penalties for breaching antitrust regulations in 2021. Alibaba, in particular, was on the receiving end of a record RMB18.2 billion (US$2.8 billion) fine for abusing its dominant market position in the retail platform service market. According to President Xi Jinping’s vision of common prosperity, reforms could be undertaken anywhere the authorities believe changes can promote social and economic stability as well as healthy competition.


 


1. The Seventh National Population Census was conducted in 2020 and results were released in May 2021. Source: National Bureau of Statistics of China


2. Average monthly disposable income of Shanghai residents based on data from the first half of 2021. Source: Source: National Bureau of Statistics of China


3. Rankings are based on CBRE’s Global Living Report 2020. Source: CBRE


4. Data as at 30 October 2021. Source: National Bureau of Statistics of China


 


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Andrew Lee is an investment director at Capital Group. He has 10 years of industry experience and joined Capital Group in 2021. Prior to joining Capital, Andrew worked as a client portfolio manager, with a focus on Asian and Greater China equities, at Barings. Before that, he was an equity product specialist at HSBC Global Asset Management. Andrew is based in Hong Kong.


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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.