Urban China’s Dilemma

Analysts at UBS have identified a challenge for a rapidly urbanizing China, and within that challenge, they see an opportunity for investors.

The challenge: more Chinese are moving to cities in search of work and they are making better money than they could in the countryside. But as incomes have risen, so have inflation and household spending. Savings by financially stretched urbanites have declined dramatically, and this means they may have trouble taking care of aging relatives and at the same time providing for their future retirement.

The chart shows how citified China has become over the past three decades - 20 percent urban households in 1980 has increased to 45 percent this year.

The opportunity: UBS has urged China to create a mandatory retirement program funded by payroll deduction as the best way to ensure that workers can eventually retire and not end up destitute in old age. If such a program were created, it could mean tens of billions of dollars worth of pension-fund investments going into the Chinese stock market.

The U.S. faced a similar senior-citizen situation in the early 20th century, when this country was going through a period of rapid industrial growth and urbanization. In the 1930s, the poverty rate among U.S. seniors was about 50 percent. The solution then was the Social Security system, which is still today the primary source of income for millions of American retirees and their dependents.

How the Beijing government chooses to address this issue remains to be seen, but there’s little time to waste - the number of Chinese age 65 and above is expected to double in the next two decades and it will take many years to build a pension system with sufficient scale to provide adequate benefits to a growing number of people with need.