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Rise in China’s Aging Population Prompts a Rethink for the US

Sigma Investment Counselors

June 7, 2013

A recent Wall Street Journalarticle reported one of many challenges China is facing: fast-growing numbers of elderly people. By 2015 there will be 220 million people older than 60 years old in China, compared with about 180 million today. According to the projections from the National Bureau of Statistics, within 40 years China will have nearly 500 million people over the age of 60, or about one-third of its future population. This will put a huge strain on its financial and human resources. As for the US, China’s top business partner, how would China’s aging population affect our economy?

One camp sees the trend presenting a challenge for many US manufacturers who outsource to China. A cheap and young labor force has been a major factor in making China appealing to many US manufactures. But this advantage is eroding. A set of United Nations data shows there were 225 million people between age 15 and 24 in 2010. By 2025, this number will fall by nearly 30% to 164 million. And in 2050, it will shrink to 124 million. The number of new entrants into the workforces is already falling and will decline by 30% in 2020 compared to 2010 figures.

The shortfall of labor supply put an upward pressure on manufacturing wages. Boston Consulting Group calculates that, at current rates, China’s private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017. The American Chamber of commerce in Shanghai recently asked its members about their biggest challenges and 91% mentioned “rising labor costs”. The cost of wages is only part of the picture. A study by the consulting firm AlixPartners estimates that if China’s currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in the US as to make them in China and ship them back. In reality, the convergence will probably be slower. But the trend is clear. Over the past few years, several global manufacturers such as Apple, GE, and Whirlpool have brought some of their product lines back to the US.

Another camp sees these same trends as enormous business opportunities. Filial piety, a Confucian philosophy that states one should be respectful and care for one’s parents and ancestors, has always played an important role in Chinese society. A recent survey found that 88.7% of the elderly who require assistance with daily activities receive it from family members. But this traditional approach, children caring for elderly parents, is falling apart under China’s rapid development. A poll conducted by Chinese Central Television revealed that 33% of people surveyed visited their parents just once a year and nearly 12% said they had not been home “in many years”. Further, with many young people living far from home and working in the big cities, it is difficult to get home to care of their aging parents. China is slowly becoming an empty-nest society.

This significant social trend could present a huge market for US companies that offer products and services for paid elderly care. Despite the huge number of senior citizens in China, there is generally a lack of focus on the part of business to target this need. To demonstrate the possible revenue we can do a quick calculation: 500 million old people paying 1,000 yuan ($161) a month, comes to half a trillion yuan ($80 billion) a month.

Technology firms can also play a huge part in this segment by satisfying the needs of the seniors. Firms can offer mobile devices, computers, and online services of all kinds that are more intuitive, simple to program, and easier to commit to memory Seniors can begin using them as a convenient way to communicate with their children who are living far from home.

China’s changing demographic structure has compound effects over the country’s economy and it will take a decade for the state and private sector to navigate through it.

Thoughts and questions are welcome.

Wenma Gorman, CFA

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