Earlier this year, China reset its five-year economic target to focus on quality rather than the absolute level of growth. This move reflects changes in China’s demographic profile that will see birth rates fall, the labour force shrink, and people spend longer in retirement. It also seeks to address the “three mountains” facing the population, namely increases in housing, healthcare, and education costs.
In the face of these challenges, we look at a range of associated developments, including the adaptability of China’s corporate sector, cost control, changes in the investment landscape, and how people view retirement.
Lessons from other countries
To understand why demographics and financial planning are at the top of policymakers’ agendas, it’s worth noting that the average retirement age in China is only 54 – one of the lowest in the world.[1] And the latest feedback from officials is that this could be lengthened, albeit at a gradual pace. Bearing this in mind, Japan offers an intriguing playbook for comparison, given that evidence shows that an individual’s working years can be extended. Indeed, many people in Japan continue to work beyond their expected retirement date.
Neighbouring South Korea has been one of the world’s fastest ageing societies over the past 10 to 20 years. This has occurred as the country moved from being an export and investment-oriented market towards one that is consumer led. As such, domestic consumption in China can become a more substantial part of its economy.
However, some of the pressures from a shrinking workforce can be alleviated by technological advances, such as the adoption of robotics. We already see this with one of Korea’s leading auto manufacturers, which has reached automation levels of 95 per cent in some of its factories.[2] China, too, is already on track to become a leading nation in terms of utilising this technology.
Lights-out factories
In a separate development, a major Chinese tech firm is taking the automation theme to another level. The company operates several so-called ‘lights out factories’ that use 5G connectivity and the Internet of Things (IoT) to robotise the entire production process. The company’s consumer electronics facility in Shenzhen has seen a 30 per cent increase in efficiency, a reduction in the inventory cycle time of 15 per cent, and a 90 per cent saving in labour costs. Also, the factory headcount was consequently reduced from 328 to just 30 people. From an environmental perspective, the company is also reducing its energy outlay, which is significant as China progresses to carbon neutrality by 2060.[3]
Trimming costs
Remaining with the issue of costs, China faces twin challenges: the government could expect to see lower tax revenue from a smaller workforce coupled with a rising healthcare bill as life expectancy increases. Given health expenditure in China soared to more than 7.2 trillion yuan in 2020, it will inevitably seek to cut unnecessary costs.[4] To achieve this, policymakers are, among other initiatives attempting to cut the usage and pricing of drugs.
At the same time, attention is turning to how digital technology can help trim the cost of living among the population, especially the elderly, whose spending power is weaker. As more people over the age of 60 increasingly spend more time on digital devices, the driver here would be a range of phone apps that offer the best possible prices and deals for the money-conscious elderly.
A cylindrical structure
The most apparent financial issue for an ageing society is how it manages its pension system. Yet, a declining birth rate coupled with advances in healthcare have shaken traditional models. This is evidenced by the shape of the population demographic, which has transformed from a pyramid to almost a cylindrical structure. In fact, within 10 years, the design will be closer to an upside-down pyramid, posing a severe challenge to the retirement system.
In conjunction with the demographic pressures on pensions are the changing perceptions about saving for the future in a rapidly developing economy. Even now, China today is remarkably similar in its pension investment outlook to the US, with an excessive focus on avoiding near-term losses.
Stemming from this is renewed thinking about investment advice given rising concerns about short-term trading behaviour's impact on long-term wealth accumulation. However, market analysts suggest that this activity reflects the growing pains of a developing economy and should change as the market in China matures.
Understanding the market
A growing body of research is supporting the market’s broader understanding of retirement attitudes in China. For example, Fidelity conducts an annual Retirement Readiness Survey that assesses attitudes across different age groups.
Interestingly, the 2021 report showed that although young people have started to save more because of the pandemic, around a quarter say that cash is still their primary retirement savings mode, while 23 per cent note that they lack the financial knowledge to start investing. From an investment perspective, young people’s saving behaviour does suggest there will be many emerging brands and potential losers.
