Michael Huber - Associate Investment Analyst, CBIZ Investment Advisory Services

As the Chinese real estate industry continues to hurt (valuations shown above)[1], retail sales data in December was also quite disappointing. They missed their 8% YoY target with a print of 7.4%. This slowing was most noticeable in car sales, personal care, home appliances, office supplies, and building materials. Industrial output grew by 4.6% YoY. This was led by mining and manufacturing. It is important to note that these YoY numbers include 2022, a time when the country was still largely hanging on to strict Covid lockdowns. Consumers were thought to spend more coming out of lockdowns, and the numbers that followed simply did not account for very meaningful changes.

In response to these lackluster numbers and rising debt-to-GDP ratio[2], China has shifted attention to other sectors to help boost their economy and spur some sort of positivity. The chart below shows different leverage levels within the Chinese economy. This is something to pay attention to as the real estate valuations could further impact these numbers and may not yet be fully reflected in the data. This has largely come through as the “Silver Economy Plan”, which has ticked across many headlines over the last few months. This strategy will look boost investment in caring for the older population, which looks drastically different now than it did 35 years ago.

When looking back to what has led to this plan, their “One Child Policy” comes immediately to mind. This was in place from about 1980 and continued into 2015. It should be no surprise that China’s share of the world population has declined since then, especially as immigration has been net negative. China has historically had tougher citizenship laws as it extends almost exclusively to those who are children/close relatives of Chinese Nationals. YoY change has not been above 1% in their population growth since 1995[3], signaling that while this policy is no longer in effect, its impact is not over as the current demographics have been altered, possibly forever. The population has shifted to be more congregated in city centers as the urban population has skyrocketed from just under 19% in 1980 to over 66% today. This does, however, have a lot to do with the fact that rural areas have been rapidly converted to urban, changing the way everyday people live in China.

One factor that helped bring more people to urban centers was a policy shift in the early 2000’s aimed at helping reduce the reliance on imported technology to only 30% or less. This was a lofty goal and certainly sparked interest for investors in those areas at the time. While these efforts were noticed, imports of new high-tech products rose steadily and continues to do so as they tend to come in at the beginning of each year, steadily outpacing the previous year. With the Silver Economy Plan, they are leaning into these same popular industries like EV, solar energy (which they have dominated since around 2007), and lithium batteries. This seems like putting different wrapping paper on the same object. Of course, China has faced and continues to face pressures from various countries that are aiming to enforce anti-dumping and protect intellectual property from being stolen. This all makes for an interesting backdrop as investors begin to examine the backdrop of the Silver Economy Plan and what it could really mean going forward.

New risks are now upon the country after the demographics have been altered through the One Child Policy as well as the rapid growth of urban areas. With these restrictions in place for so long, the makeup of future demographics is still impacted. As labor has been always readily available, it also poses a risk with such a large population in the retirement age with a disproportionately lower population within the prime working age groups. Discussion is currently taking place that looks to raise the retirement ages meaningfully (right now amongst the lowest in the world 60 for men, 55 white collar women, and 50 for women working in factories). As these policies have created a generation of only children, aging parents now face less family around to help take care of them. This creates the need for more support whether it be financially or physically. This seems to be the root of the Silver Economy Plan. Although, details are not fine tuned (or if they are, not public) for outside investors to have a better idea as to what the path will look like to get to that goal.