Retiring in China… Are Retirees a (Financial) Force or Threat?


Those of you who are familiar with the United States demographic landscape know all too well how the “Baby Boomer” generation that consists of individuals who have either retired or are retiring is shaping the economy. Across the US, entire sectors are adapting to the present as well as future needs of the generation in question. Perhaps an even more (in)famous example is represented by the demographic challenges Japan is dealing with and how not just specific sectors but the entire economy of Japan has been trying to cope with the aging of the country’s population, along with the economic consequences this brings about.

China is most definitely not an exception.

For an extended period of time, the aging of China’s population was considered anything but a policy priority, as other (more pressing) issues prevailed. As problems compounded, however, significant measures had to be taken, including the elimination of China’s one child policy. Unfortunately, this has not been enough and while China’s demographic issues aren’t as serious as let’s say Japan’s… the situation looks anything but promising.

According to current estimates, roughly one of every three Chinese citizens will be aged 60 or above by the year 2050. On the employment front, falling birthrates are bringing about a workforce shrinking process. Survey data from the Ministry of Human Resources and Social Security indicates that back in 2011, there were 3.1 active workers for every pensioner. At this point, that ratio has done down to just 2.8.

To make matters worse, China doesn’t have the infrastructure in place required to manage this issue as effectively as Japan or the United States. In China, the pension contribution collection system is so fragmented and corrupt that there just isn’t enough money flowing in to bring things toward a path of sustainability. Tax evasion is rampant and the (local) authorities are simply beyond overwhelmed in many cases.

Also, there is a high dependence on pension funds that are… well, under-performing, with them accounting for approximately 70% of collections at this point in time. In 2018, the overall deficit experienced by these funds was in $35 billion territory and by 2022, it is expected to represent over two times more.

Then, of course, there is the issue of not just fragmentation with respect to the collection of contributions but also as far as nominal pensions are concerned. Retirees from affluent regions such as Shenzhen, Shanghai or Beijing receive pensions which amount to roughly $600 per capita monthly. Those less fortunate, for example retirees from rural areas, sometimes receive a mere $13 monthly.

Finally, to end the negativity chapter, government spending in this area is anything but sustainable. According to a recent study, the government is currently allocating a staggering 11.6% of the Gross Domestic Product toward pensions, health care and education, a percentage almost two times higher than that of 2007. This spending increase is even greater than that experienced by the military and security sectors.

However, opportunities also abound when it comes to this demographic and its needs.

It is important to note that even more so than in the West, thought currents such as Confucianism (which place a great deal of importance on protecting and respecting the elders) brought about a cultural environment in which the population considers it a top priority to find a solution for the various problems of retired individual and retirees. Time and time again, this issue proves to be a top priority according to national surveys.

Furthermore, measures have been recently put in place by the authorities to reform the system. For example, the social security contribution collection process should ultimately become far less fragmented as a result of the reform plan adopted in July of 2018 and which started producing effects on the 1st of January 2019. It revolves around the idea of increasing effectiveness whatever it takes, even if this comes with a greater degree of centralization.

Even more so, we need to understand that, again, the average Chinese individual is far more willing to support older family members that the average Westerner. Yes, it is true that the Chinese workforce is shrinking but it is also true that the average Chinese citizen is becoming more and more affluent. As such, the financial relief that will come from this direction should not be underestimated.

Finally, there is of course human ingenuity which needs to be added to the mix. Media outlet after media outlet has highlighted the fact that robotics and all sorts of other technological breakthroughs enabled Japan to cope with its elderly care requirements, despite a workforce that has been shrinking at an even more alarming rate than that of China. As highlighted here on rather frequently, China has also been paying more and more attention to the research and development dimension of its economy and as such, the “ingenuity” variable should not be underestimated either.

From the perspective of an investor who is interested in taking advantage of the various opportunities which exist in China, it’s important to understand that this demographic reality is not going anywhere. Yes, there are challenges involved but opportunities balance them out rather nicely. By gaining exposure to assets associated with entities capable of helping China tackle the issues of retired individuals and retirees, you can be on the receiving end of career-altering asset appreciation as well as various other gains. To explore such opportunities in greater detail, simply reach out by visiting the Consulting section of our website.

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