China’s Demographic Collapse

I love China stocks as an investment … for the next few years, anyway.

As I wrote recently, Chinese stocks are almost ridiculously cheap at current prices. Plus, the reorganization of the Chinese economy away from investment and export and into “Western-style” domestic consumption should create incredible opportunities for Chinese stocks, as well as for American and European firms selling to the Chinese consumer.

Opportunities to invest in major shifts like this only come around a couple times in a lifetime. I am currently long China and have no immediate plans to sell.

But as bullish as I am on China stocks at this time, investors need to keep the big picture in mind.

Demographics Will Hamper China Stocks

Chinese stocks are a great trade — and I believe a great multiyear trade — but they’re not something you should consider as a long-term investment. China is facing demographic collapse in the decades ahead, and I say this as a sober analyst, not a wild-eyed doom-and-gloomer.

When I speak of “demographic collapse,” I’m not talking about plague, pestilence or a scene from a Mad Max movie. I’m talking about a Japanese-style economic malaise, a prolonged period of slow growth, falling asset values and falling consumer prices.

Like Japan, China has a society that is aging rapidly. By the Chinese government’s own demographic estimates, the number of people above age 60 in China is projected to increase to 437 million, or 30% of the population, by 2050.

Last year, the number was 194 million, or 14.3% of the population.

I know, I know. Life begins at 40, and 60 is the new 30. People are living and staying active far longer than they used to. But underneath this cheery optimism is a far more grim reality. After the age of about 50, consumers in advanced economies tend to spend less of their income and save more, and China’s middle and upper classes will be no different than their Japanese and Western counterparts.

Once you reach a certain age, you already own the largest and most expensive home you ever plan to own, you’ve already paid off the mortgage, and you’ve already furnished it. You continue to spend money on basic necessities and simple luxuries. But your purchases of the large, big-ticket items slow to almost zero.

All else equal, an aging population will mean a stagnating domestic economy and a shrinking tax base … even while government expenditures rise. And as Japan is discovering now — and China will discover in the decades ahead — there is no obvious solution.

Few Answers for China & Others

I recently had a good-natured Twitter argument with fellow InvestorPlace contributor Aaron Levitt. Levitt took the view that, faced with an aging population, China will simply raise its birthrate.

@CharlesSizemore Didn’t Mao say that China “will make babies like it never did before” when threatened with nuclear war? Still applies.

— Aaron Levitt (@AaronLevitt) October 29, 2013

 

Alas, if only it were that simple.

Raising the birthrate requires young women of childbearing age. And as the following chart should make abundantly clear, potential Chinese mothers are about to be in increasingly short supply:

This demographic data comes directly from the United Nations. The number of Chinese women aged 20-24 is already in decline, and the number of women aged 25-29 goes into steep decline starting in 2015.

True enough, women in advanced countries are having children later in life, and Chinese women could follow this trend. But the population of Chinese women aged 30-34 and 35-39 go into steep decline in 2020 and 2025, respectively.

If there is to be a Chinese baby boom, it had better happen fast.

But it’s doubtful that will happen. There is the little problem of the one-child policy, which prevents most urban middle-class Chinese families from having more than one child. And there is the simple reality that, once a society adapts to having a low birthrate, it’s hard to turn that battleship on a dime. Living costs have risen in the cities to the point that large families are not economically viable for the vast majority of Chinese households.

Could the Chinese government implement strong pro-natal policies that economically incentivize Chinese women to have more kids? Maybe, but for several years Russia has been offering cash rewards of $10,000 to mothers for the birth of their second child, and the Russian birthrate is still well below the replacement rate.

And Chinese citizens, having experienced economic freedoms in recent decades, are not as pliant to government decrees as they once were.

Again, I am still wildly bullish on Chinese stocks for the next one to four years. But looking into the decades ahead, China will hit a demographic brick wall — and China stocks will react accordingly.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.