Asian Demographics Change Demand Patterns

THIS blog was once criticised for devoting too much time to the big picture – e.g. politics, economics and demographics – one of the major themes of our free e-book, Boom, Gloom & The New Normal.

We beg to differ. While studying chemical-plant operating rates, new capacities, feedstock advantages and logistics etc are, of course, of huge importance for our industry, the big picture shapes the micro-picture.

And there is no better example than in the case of demographics. Hence, in a series of special posts, we will this week examine the implications of demographics on Asian economies.

This will include the huge challenge China faces in paying for its army of retirees and the horrors of the existing healthcare and elderly-care systems, which are in need of massive reform.

We will also look at India’s very different challenge of providing enough work for its relatively youthful population.

And we will look at how ageing is affecting developed Asian economies ex-Japan (the Japan story has been well-documented), such as South Korea and Singapore.

In our first post, we summarise some of the key demographic trends across Asia – and the major challenges that these entail – thanks to a new HSBC reports, which provides important support for our arguments.

 

By John Richardson

Demographics determine savings rates, drive investments and economic growth, while also affecting wealth distribution through the generations, says Julia Wang, Hong Kong-based economist with HSBC, in a 14 November report.

“That Europe is slowly ageing is well-studied. However Asia is also undergoing an especially big turn. Populations are ageing in Asia far more rapidly than anywhere else in the world,” she adds.

The chart below, from the HSBC report, shows that the ratio of over 65s is set to triple in Asia, with the exception of Australia, New Zealand and Japan (in Japan, the ratio is already high).

HSBC5.jpgIn China for example, this ratio will rise from 9.9% to 30.8%, less than elsewhere, but still a significant increase, thanks to the disastrous one-child policy.

In South Korea, the over 65 ratio will jump from 13.8% currently to 40.2% in 2050. This implies that nearly one in two South Koreans will be over the age of 65, says Wang.

“Bear in mind that demographic projections are based on parameters such as fertility, mortality and life expectancy, which are largely known and unlikely to change short of major catastrophes or scientific breakthroughs,” she adds.

We argue the same in our e-book, and believe that chemicals companies have to, as a result, run their businesses in very different ways.

“Across the region, including Australia and New Zealand, in less than four decades the number of people aged 65 and over will jump from the 300 million currently to 960 million. Forty five percent of them will be in China. The ratio of over 65 year olds to total population will rise from 1:14 currently to 1:6,” she continues.

“Incidentally, the Chinese population will start to decline in 2035 as will its share of the Asian population. India will replace China as the most populous country in Asia.”

The result of rising median ages (see the chart below) is a much larger elderly population dependent on an ever-shrinking workforce, says Wang.

HSBC4.jpg

“Over the next four decades, dependency ratios will more than double in Hong Kong, Japan, South Korea, Singapore and Taiwan,” she adds.

“The ratio will be higher than 1:1 in Hong Kong, Japan, South Korea and Singapore. This will have a major impact on savings, consumption patterns and government finances,” adds Wang.

“Currently, the region vastly under-spends on age-related social security and healthcare compared to developed markets, reflecting the relatively young populations and less comprehensive social safety nets.”

This enables governments to prioritise other types of spending, such as infrastructure, she adds.

“However this advantage will disappear quickly. As working populations get older, richer and scarcer, demand for more comprehensive healthcare and social security will arise.

“Take pensions. In most Asian economies, coverage ratios are still low. This suggests that most governments have not yet adequately prepared for the rising tide of retirees in the coming years.”

Pension coverage is 92% in Western Europe, but only 30% in China and 20% in Thailand. This will need to rise, and quite quickly in order to deal with ageing populations, she believes.

“Some governments are already starting work on this, most notably China. But there is still a long way to go. If coverage is expanded, this will likely push-up wage costs still further,” she says.

“If coverage is not expanded, governments will suddenly be saddled with huge liabilities that are inadequately provisioned for.”

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