The Valor Blog.
Investment News and Views, Direct from Our Team.

Demographics in China

There is still a belief that the current slowdown in China is temporary and after this short hiccup, most believe that China will continue onto over taking the US as the dominant economy at some stage in the next few decades. Looking at the demographic trends and I am not so sure.

Whist Harry S Dent makes some absurd predictions and I dont follow his tea leaf forecasts, his work on demographics and the effect on the economy has some merit. China has some potentially disastrous demographic trends due to the one child policy which will likely detract from future growth more than many predict.

The property bubble over the last few years has been compounded by the fact that for a young male you have had great difficulty in wooing a wife without owning an apartment. Looking at the one child policy which started in 1979 (one year after I was born) and mirroring that to the average age for males to marry (approximately age 32) and it is obvious we are at a junction point. The number of single child males that are to marry in the future will be fewer and so there is likely to be less pressure for buying apartments to marry.

With an aging population in a society with virtually no safety net and fewer children and grandchildren to look after the elderly, it becomes apparent that there are some very challenging demographic trends.

The worlds factory has had an abundance of young workers to chose from over the last decade, however as that workforce ages, will the older workers demand higher wages and better conditions? Will this make the marginal returns of many Chinese exporters uneconomic? What industries will China have to develop as the wages rise to counteract the more marginal operations of the manufacturing enterprises? Can they overcome these issues?

When I was in Guangzhou earlier this year I noticed a disproportionate number of younger people on the trains and wandering around the city. My Chinese friend explained to me that many of these migrant workers come from the countryside to work in the factories. What happens in the future when this flow of migrant workers slows?

Economic forecasting using demographics is no where near an accurate science, but for those investing in Australia in companies which rely on China’s miracle economy, I would suggest that they look further into the risks they are taking over the medium term. The potential downside for these investments is larger than most would acknowledge. As Buffett always says:

Rule Number 1: Dont lose money
Rule Number 2: Dont forget rule number one.

When making investments in cyclical companies based on China’s endless economic growth, I do not believe you are ensuring you meet these two simple rules.