What are the political and social consequences?
A continuation of these trends will place ever greater burdens on the working young who must support their elderly kin, as well as on government-run pension and health-care systems. China's great "demographic dividend" (a rising share of working-age adults) is almost over. Other countries are also aging and have far lower birth rates. But China is the first to face the issue before it has developed - and the shift is two to three times as fast. China can help deal with increased costs by raising its retirement age; at present, only about a fifth of urban women are still working at 55. Improving education should also raise productivity. Some experts believe such measures will be enough to wipe out the "demographic debt."
1. 4-2-1 phenomenon: In the traditional Chinese family, children, especially sons, look after their parents. But rapid aging also means China faces what is called the "4-2-1 phenomenon": each only child is responsible for two parents and four grandparents. Even with high savings rates, it seems unlikely that the younger generation will be able or willing to afford such a burden. So most elderly Chinese will be obliged to rely heavily on social-security pensions.
2. Pension Problems: At this rate, China will have a bulge of pensioners before it has developed the means of looking after them. Unlike its counterparts in the developed world, China will grow old before it gets rich. Now, 8.2% of China's total population is over 65 (vs. 13% in America). By 2050, China's share will be 26%, higher than in America. In 2000, China set up a national pensions fund, which is in crisis. Only about 365m people have a formal pension. Also, the country's unfunded pension liability is around 150% of GDP. Almost half the (separate) pension funds run by provinces are in the red, and local governments have sometimes reneged on payments.
3. Shrinking Workforce: China's workforce will shrink by 11 percentage points, from 72% to 61% between 2010 and 2050. This implies a huge contraction, even after taking the fact that the current workforce share is exceptionally large. This would be followed by soaring old age dependency ratio. Currently it stands at 11, roughly half America's level of 20. But by 2050, China's old-age ratio will have risen 4x to 42, surpassing America's. Even more strikingly, by 2050, the number of people coming towards the end of their working lives (i.e., those in their 50s) will have risen by more than 10%. The number of those just setting out (those in their early 20s, who are usually the best educated and most productive members of society) will have halved.
Source: UN, 2009.
What makes China's problem unique?
China's problems are similar to those of its counterparts in the rich Western countries which are facing rising pensions. However China has the added advantage of dealing with them in 2 ways - 1) current low tax rates offer more room for future increases to meet the rising financial commitments, and 2) low expectations of public welfare from its citizens. China is also unusual in 2 aspects - 1) it is much poorer than other aging countries, and 2) its demographic transition has been much more abrupt.
What do these consequences imply?
1. End of cheap labor and seal China's fate as the world's factory: This phenomenon would mark the end of cheap labor. It should also be noted that China faces a shortage of manual workers, despite having pools of underemployed country-dwellers. According to a study conducted by Sarah Harper of the Oxford Institute of Population Aging, China already has a strategy in place mapping the age structure of its jobs, and for which occupation, when the skills shortage will hit. She also points out the chances of becoming a future magnet for attracting world skills and estimates that by 2030 the brain drain will reverse, moving from the U.S. to China.
2. Immigration problems: China can take a page from America's book, one of the rare examples of a country that has managed to use mass immigration to build a skilled labor force. But it should be noted that America is an open, multi-ethnic society with a long history of immigration and strong legal and political institutions, which China totally lacks.
Investment options: I believe the increase in the aging population could be one of the key growth drivers for the global healthcare, medical devices and pharmaceutical companies in the next 5-10 years. Investing in health care ETFs like Dow Jones U.S. Healthcare Sector Index Fund (IYH) can provide good exposure to this trend. The top 50 holdings of the fund include:
Johnson & Johnson (JNJ)
St Jude Medical Inc (STJ)
Pfizer Inc (PFE)
Vertex Pharmaceuticals Inc (VRTX)
Merck & Co. Inc. (MRK)
Zimmer Holdings Inc (ZMH)
Abbott Laboratories (ABT)
Edwards Lifesciences Corp (EW)
Amgen Inc (AMGN)
Regeneron Pharmaceuticals (REGN)
Unitedhealth Group Inc (UNH)
Mylan Inc (MYL)
Bristol-Myers Squibb Co (BMY)
Watson Pharmaceuticals Inc (WPI)
Express Scripts Holding Co (ESRX)
Perrigo Co (PRGO)
Eli Lilly & Co (LLY)
Quest Diagnostics Inc (DGX)
Medtronic Inc (MDT)
Forest Laboratories Inc (FRX)
Gilead Sciences Inc (GILD)
Laboratory Crp Of Amer Hldgs (LH)
Biogen Idec Inc (BIIB)
Boston Scientific Corp (BSX)
Baxter International Inc (BAX)
Cr Bard Inc (BCR)
Celgene Corp (CELG)
Davita Inc (DVA)
Allergan Inc (AGN)
Life Technologies Corp (LIFE)
Covidien Plc (COV)
Waters Corp (WAT)
Wellpoint Inc (WLP)
Henry Schein Inc (HSIC)
Intuitive Surgical Inc (ISRG)
Varian Medical Systems Inc (VAR)
Thermo Fisher Scientific Inc (TMO)
Carefusion Corp (CFN)
Alexion Pharmaceuticals Inc (ALXN)
Hospira Inc (HSP)
Aetna Inc (AET)
Dentsply International Inc (XRAY)
Stryker Corp (SYK)
Illumina Inc (ILMN)
Becton Dickinson And Co (BDX)
Idexx Laboratories Inc (IDXX)
Humana Inc (HUM)
Resmed Inc (RMD)
Cigna Corp (CI)
Coventry Health Care Inc (CVH)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.