Investors warned to take a long view as China's population declines faster than expected
China analysts expect that the country’s population could start to decline as soon as 2025, at least five years earlier than United Nations and government forecasts, leading to major structural shifts in the economy.
Experts believe the “next to zero” demographic growth will hit the country's consumer and manufacturing sector at the same time as slowly pushing up inflation levels, which could benefit real assets and companies with stronger pricing power.
Fixed income experts, which are looking at Japan as a litmus for how to respond to an ageing demographic, are also positive about super-long duration Chinese government bonds.
China’s National Bureau of Statistics released the country’s latest population growth figure last week, showing a rise of just 480,000, or 0.034%, to 1.413 billion in 2021. This compares with a rise of 2.04 million people, or 0.145% in 2020.
The first time that China’s population increased by less than a million, the growth figures showed the fifth annual slowdown since 2016 and comes despite the central government switching to a third-child policy.
China mandated a one-child policy between 1980 and 2015 which has now seriously affected the country's growth curve, leading to problems of a "greying" society.
“Demographics is often seen as a long-term issue, 10 years in the future, with nothing to worry about here and now. But what we know now is that this demographic issue is very much here and now, and it's likely to get worse in coming years on top of current cyclical headwinds in China,” noted Sue Trinh, head of macro strategy for Asia with Manulife Investment Management, during a recent outlook webinar.
As the demographic dividend continues to diminish, and the automation dividend grows, Michelle Qi, head of equities with Eastspring Investments Shanghai, believes there will be increasing automation and demand for intelligent manufacturing as labour costs grow further.
“This, along with the trend of domestic substitution, will prompt more investment opportunities in the advanced manufacturing sector,” Qi told AsianInvestor. “On the consumption front, slower population growth implies slower growth in overall household consumption, especially in the Covid context. We believe more structural opportunities will emerge in the consumer segment, such as duty-free, cosmetics, etc.”
Agreeing with Qi, Kenglin Tan, senior portfolio manager, equities at Manulife IM thought more consumers in China will shift towards more lifestyle-based consumption, upgrading their choice of goods and services as their income per capita continues to grow.
“As income continues to grow in China, and China is also encouraging middle-income growth, we will also see the wealth management industry taking off from here,” Tan added.
JAPANIFICATION
China will have to grapple with a rapidly ageing demographic in the coming years. By the end of 2021, 18.9% of its population has been 60 years old or above.
“As demand growth declines, and savings rates increase in adjustment to demographic changes, China’s economy could undergo some form of Japanification,” said Rong Ren Goh, fixed income portfolio manager with Eastspring Investments.
“The resulting inability of monetary policy to tighten meaningfully, and increased demand for risk-free assets, would likely result in lower bond yields. This advocates a structural allocation to duration in Chinese government bonds (CGB) in anticipation of the above multi-year trend,” he told AsianInvestor.
Also taking Japan as an example, Paula Chan, senior portfolio manager for Asia fixed income at Manulife IM, noted an ageing population creates significant demand for long-term investment, which makes the 50-year CGB, now yielding 3.42%, quite interesting.
“I think this is something especially [good] for the insurance companies, when they price their products, it will be long-standing demand at the long end of the [fixed income] curve,” Chan said.
GROWING INFLATION
Pictet Wealth Management’s head of Asia macroeconomic research Dong Chen noted that the firm has forecast that China’s economic growth, in lockstep with its declining population, will continue to slow in the coming decades.
However, unlike Japan, China is still at the early stage of an ageing society, where the elderly aged above 60 but below 80 are still the majority.
Under such a demographic structure, the number of consumers could outpace the working population over a certain period to push up inflation levels slowly, Chen said.
In that scenario, investors are advised to invest in Chinese companies that have strong pricing power to shift rising costs to consumers or downstream companies.
“Real assets are also an important part of China investments should inflation pick up in the long run, especially when investors have started to face an inflationary environment entering 2022,” Chen told AsianInvestor.