It will be still be a few weeks before Q3 economic data comes out for China, and in advance of our next round of forecast updates we have been digging into pending industrial policy changes. This includes looking at those sectors and firms we expect to benefit from the “Emerging Industries Development Plan”, which itself is linked to broader sector and macro objectives that will be enshrined in the 12th Five-Year Plan (2011-2015). The social and economic consequences of shifting demographics in China will become apparent towards the end of the next 5-year policy cycle, and related considerations feature prominently in the reform and development agendas that will be released during Q4.
The leadership in Beijing has long anticipated the expiration of China’s demographic dividend, referring to the increase to GDP growth that occurs as the proportion of the working age population rises in a given economy. According to various population forecasts by multilateral agencies China’s working age population will peak as a share of the total somewhere between 2012 and 2015. We tend to think that there is significant under-counting where it comes to young rural populations, and that this peak may thus be delayed by several years. Nevertheless, depending on certain forecast parameters, such as the rate of labor force participation by women, for example, the proportion of actively employed persons in the Chinese economy is nearing its peak, which means that potential economic growth rates in will increasingly depend on enhancements to total factor productivity (basically how efficiently the economy functions as a system) and additions to the capital stock that enhance productivity per worker. (Click to enlarge)
For economic planners in Beijing, the goals of maintaining rates of economic productivity growth and caring for an aging population lead to some interesting opportunities to advance China’s model of state-led capitalism. Rightly or wrongly, many in Beijing believe that the global financial crisis vindicated the “socialist market economy with Chinese characteristics”, and looking ahead to the next 5-Year Plan this means that the phrase “the state leads and industry follows” will become commonplace when discussing the development of key industrial sectors in China. Sectors that offers great potential for productivity gains that advance social policy interests include biotech and biochemistry, as the government (like the peers worldwide) searches for innovations and cost savings that will ease the fiscal burden associated with a graying population. Based on conversations with policy advisors in Beijing, these sectors are very likely to be singled out for special support in the next 5-Year Plan, and will benefit both directly and indirectly from efforts to create an “experimental economy” where R&D activities feature more prominently in corporate development activities than they have in the recent past.
From the chart below it is clear that China’s old age dependency ratio, defined here as the proportion of the total population aged 60 years and higher, will soon begin to increase at an increasing rate. This shift will be far more moderate than a typical walk through the “elbow of the curve”, but notwithstanding high rates of annual and accumulated household savings, Chinese society is under-provisioned for this transition. Over time this has been exacerbated by massive revenue-expenditure mismatches between the central and local governments, not to mention inadequate pensions and a chaotic system of public hospitals and clinics. This leaves a big opening for private firms to capture the value created by private expenditures on a combination of filial obligations and necessity.
The options for exposure to China’s pharmaceuticals and medical devices sectors are still relatively few, but several of the widely known names will probably get a nice boost from central and provincial-level economic plans. More generally, we expect spending on healthcare in China to increase at annual rates far in excess of overall GDP (perhaps 2x in the coming years), and will be resistant to the overall moderation to GDP growth that most are expecting. There is obviously a big role for foreign firms in this space, but the desire to create national champions has not disappeared. Another area to watch will be the market for private medical services, including traditional hospitals, retirement facilities and other services providers related to caring for an aging population. It is no coincidence that these sectors are opening up to foreign investment, and don’t be surprised to see a rush of PE funds into higher-end ventures of this kind. Healthcare services accounted for less than 2% of all value added in the Chinese economy during 2009, and an even smaller proportion of overall capex. In the future related expenditure patterns will track demographics far more closely than GDP.
Disclosure: No positions