According to the recent white paper Demographics in Emerging Markets: Hope or Hype by Mirae Asset Management, over the next 40 years or so, China will go through a large change in both the average age and spending habits of its population.
Demographers have created a Life-Cycle Hypothesis to explain earnings and savings rates in a country. This hypothesis says that when people are very young or very old, they don’t work and thus don’t save. During their working years, however, they save at higher rates.
If a country has a large population of either “youth” or “elderly” dependents, compared to its population of working-age people, the savings rate for the country will be relatively low.
In 2010, China had a median age (35.5 years) that was higher than most larger emerging markets countries except Korea (38.4 years) and Russia (38.7 years).
This relatively old average age reflected the fact that a higher percentage of Chinese were working than were underage or retired. It also led to a very high rate of household savings for the Chinese compared to almost all other countries. In fact, during 2010, the Chinese saved nearly 37% of their pay!
Demographers expect that this high rate of savings among the Chinese will continue for at least the next decade.
As we have shown in other blog posts, however, this high savings rate will change over the next 20-30 years. There are a few good reasons for this:
- Limitations on the number of children in each Chinese family will reduce the number of “youth” dependents.
- As the high number of Chinese workers begin to retire, they will be added to the group of “elderly” dependents. These elderly dependents won’t be savers, they will be consumers.
- This will force the overall savings rates of the Chinese down, and they will use this extra spending to increase their consumption of products and services.
Smart global companies will understand this Chinese retirement boom, and will position their products and services toward the huge number of individuals in this group.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, Washington