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Don't Ignore Chinese Demographic Changes

Daniel Rohr, CFA

Dan Rohr: Amid the daily barrage of news--elections, Fed meetings, the stock market's ups and downs--it's easy to overlook slower moving developments that can have a more important and longer-lasting impact on economies and markets.

Demographic change is a good example. The influence of demography is imperceptible quarter to quarter or year-to-year, but in the long-term, it can prove decisive. In the case of China's economy, demographic change is likely to take the economic narrative of the past 30 years and turn it on its head. 

The seemingly limitless supply of "surplus" rural labor, which fueled rapid urbanization and productivity gains, will begin to dry up. The working-age population, after expanding by over 400 million in the past 30 years, will contract, just as the senior population surges. As a result, China's unusually high support ratio--the number of working-age adults for every child and senior--will begin to fall, draining the pool of savings that funds outsize construction spending.

A reversal of prior demographic trends informs a great deal of our long-term economic outlook for China. It's a big reason why we expect Chinese GDP to grow less than 4% on average over the next 10 years, and why we expect construction spending to stall. The ramifications will be felt far beyond China's borders and will impact a variety of industries, from healthcare to materials to consumer. Long-term investors would do well to take a break from the fire hose of daily news flow to consider what demographic change in the world's largest country will mean for their portfolio. 

Demographic change may not be important for the quarter to come, but in the long term, there is some truth to the phrase "demography is destiny."