In late October, the shares of Chinese companies that make baby formula, strollers, and diapers jumped sharply after the Chinese government said it’s going to allow couples to have two children. It’s a great story – but investors who bought those shares are missing the bigger story.
The Chinese government is going reverse the rule that limited couples to having only one child, which has been in force since 1979. Companies selling things for babies and children will probably benefit from the change in the long term.
But as the chart below shows, some of those stocks that jumped after the announcement, are now down from where they stood just days before the announcement. Most of them have also underperformed the stock exchanges that they’re listed on as well.
Stock market investors like a good story. But here, the real opportunity is in the stocks of companies in China that sell things that old people want.
Back in the 1970s, a lot of people worried that overpopulation would overwhelm the earth’s resources. China, then a poor developing country with the world’s largest population, decided that driving down its birth rate was the answer to its problems.
Fast forward 35 years, the earth is struggling – because of man-made problems, rather than simply too many people. The bigger problem might be that China’s one-child policy has proved to be an economic time bomb.
China’s rapidly aging population means that it will run short of workers in coming years. The United Nations says that the country’s working population will fall by 67 million people – as much as the entire population of Thailand – by 2030.
More people means more economic growth. In order to grow, an economy needs more people to work in factories and offices and farms… and more people to buy houses and cars and go out to restaurants. If population growth slows, or stops, the remaining workers have to become more efficient and productive to make up for it, or immigration has to rise. Otherwise, economic growth will stall.
As you’ve probably heard, China’s economic growth is already slowing. That’s a big problem for the global economy – and for China’s government. In its search for ways to boost economic growth, the government’s decision to get rid of the one-child policy to promote population growth makes a lot of sense. Although it’s not an immediate solution, more people equals more economic growth.
But will China’s parents want more children? In 2013, the government partially relaxed the one-child rule to allow a couple to bear a second child if one spouse was an only child. But just 12% of qualifying couples applied for permission to have a second child. (Yes, in China you have to get government approval to have a second kid.)
One survey found that only about half of people living in China’s cities said that they might be interested in having a second child. And even in the rural hinterland, where in the past families wanted more kids to work the fields and milk the cows, couples are not so keen on having more children. Among other things, children are money pits – especially in cities, where real estate is expensive.
Meanwhile, people in China are marrying later – which also leads to lower levels of baby making. And it doesn’t help that today, about 116 boys are born for 100 girls in China. So millions of men are locked out of the reproduction game.
Demographics are stronger than any government – even China’s. The country’s hoped-for baby boom will probably be no more than a baby pop.
The far bigger opportunity for investors is the greying of China’s population. Around 10% of the population is older than 65, and 15% will be by 2027. That’s like twice the population of Philippines full of grannies and grandpas. Japan is already grappling with an aging population, and by the same year, its percentage of people over 65 years of age is expected to be 30%.
“China will become world’s largest elderly home,” one banker was quoted as saying in the Wall Street Journal.
The occupants of that home of those old people will need health care, hospitals, doctors and places to live. As China becomes wealthier, its people will increasingly suffer from rich-country diseases like cancer, cardiac disease, diabetes, and other expensive ailments. A forecast by consultants McKinsey & Company projects that healthcare spending in China by 2020 is going to roughly triple from recent levels, to US$1 trillion a year.
Forget the baby pop. Old people are the trillion-dollar opportunity investors should be looking at in China.