China faces ageing challenges

As the global economy, including emerging markets, continues to endure a prolonged pattern of market and economic unrest, historical comparisons maybe worth taking into consideration.

Take Japan and its ‘lost decade’ of the 1990s. The Chinese authorities, for example, certainly seem to have taken on board significant Japanese lessons. This was not to succumb to pressure for rapid currency revaluation in the way Japan did in the so-called ‘Plaza Accord’ of 1985 – a move which led to rapid appreciation of the yen, which in turn put enormous pressure on Japan’s economy during the subsequent 10 years.

After its problems in the 1990s, induced by reducing its indebtedness, Japan only grew 50 per cent as fast as the US in the following decade. A key driver of this was its population decrease during the period, while the US population rose.

The upshot of this was a ‘demographic drag’ where fewer workers were coming into the labour force. The proportion of workers in the total population is forecast to fall from 66 per cent in 2005 to 51 per cent in 2050, an absolute fall of 28m workers. This compares with a worker-to-total population ratio in China, for example, that is expected to reach 72 per cent by 2015 although this ratio should then start to fall.

One way of addressing this ageing problem will be to tap into countries which have a surplus of labour and positive demographics, that is, emerging markets, which have younger populations or where labour is released as a result of continued rapid urbanisation – for example, in China or Indonesia.

This has already been happening in Japan and likewise in developed Europe, where the process has also progressed, including sizeable inflows into countries like the UK and Germany from parts of emerging Europe with younger populations, including Poland and Turkey.

However, more inward migration will be necessary to ward off the debilitating economic effects of ageing populations. We anticipate developing markets will to continue to enjoy positive growth compared with the progress in the developed world, as debt is less of a burden and overall demographics are more supportive. But in order to keep this momentum up, growth needs to be more domestically driven and less dependent on developed world demand than was the case in the pre-2008 crisis period. In some regions, this will mean higher investment. In other emerging markets, consumer spending will need to be boosted as a proportion of GDP. Continued urbanisation in economies like China and Indonesia should help boost this, as should rising real wages in a number of emerging markets.

Looking at emerging markets, and indeed at global markets, a rally in related riskier assets from here is perfectly conceivable. Of course, what the driver or catalyst of this might be is currently very difficult to pinpoint, but investors should bear in mind that a lot of negativity has already been priced in. While the prices of emerging market assets could go lower in the short term, long-term returns still have the potential to be robust.

Philip Poole is global head of macro and investment strategy at HSBC Global Asset Management