Antitrust, reform in education, real estate and medical care policies, Common Prosperity... all of these show that China is undergoing earth-shaking change. These changes have brought large uncertainty, making many investors afraid to invest in Chinese projects and companies. However, over the next decade, China sure will become the world's largest economy. How to better understand the opportunities and risks of the Chinese market and deal with certainty and uncertainty is a crucial problem. EqualOcean launched a series of research, China's Future Investment Watch, hoping to provide clues for global investors.
Owning abundant natural resources and a relatively stable political environment, China has maintained a large population since the establishment of the Han Dynasty in 202 B.C. In the past 2000 years, the demographic dividend has always been one of the main drivers of its development. However, in recent years, with the deepening of globalization and the change of population structure, we have observed that China's demographic dividend has been decreasing, while the talent dividend is increasing; this, we think, will be the new driver in China's new developing stage, a stage focusing on advanced manufacturing.
From demographic dividend to talent dividend
China launched a national census in 2020, and its result shows that China's population reached 1.44 billion, with a CAGR of 0.53% in the past decade, lower than the rate of 0.57% in the first decade of the 21st century. The data shows that China's population has continued to maintain a low-speed growth trend in the past decades (compared with other developing countries). In terms of population structure, China's working-age population aged 15 to 64 reaches 894.38 million, accounting for 63.35%, down 6.79% decade over decade. Although labor resources are still abundant, the downward trend is also very obvious.
Generally, the size of the demographic dividend is usually expressed by the total dependency ratio, that is, the population under the age of 14 and over the age of 65 divided by the working-age population (aged 15 to 64). A demographic dividend occurs when the ratio is less than 50%. In 1990, China's total dependency ratio reached 50%. After that, the ratio remained below 40% for a long time. However, in recent years, due to the adjustment of fertility policy (two-child policy for singletons couples was implemented in 2013, the comprehensive two-child policy was implemented in 2015, while the three-child policy was implemented in 2021) and the changes in China's economic structure, the ratio has shown an upward trend. According to the data from the census, the ratio increased to 45.9% in 2020. Considering the far-reaching impact of family planning policy (allowing couples to have up to one child) and the difficulty of implementing the multi-child policy, we believe that China's population dependency ratio will continue to rise. It is estimated that China's total dependency ratio will be 49.7% by 2030, indicating an end of China's demographic dividend era.
Nevertheless, we do not think such an end is a dangerous signal. On the contrary, we believe that China is turning to a talent-driven developing mode. As Premier Keqiang Li said at the 17th National Trade Unions' Congress in October 2018, China is accelerating from demographic dividend to talent dividend. There are three changes showing that talent dividends drivers will shaping future development.
First, China's illiterate population (illiterate people aged 15 and over) decreased to 37.75 million, accounting for 2.67% of the whole population, down 34.6% from 4.08% decade over decade. Secondly, among the current national population, 218.36 million people hold bachelor' Degrees or Associates' degrees, accounting for 15.6%, up 75.3% decade over decade. Among the national population, the average number of years of education for people increased from 9.08 to 9.91. It is predicted that China's workforce with a college education or above will reach 265 million by 2025 (please check here).
Second, the highly educated population (Masters' degree and higher) has also shown a blowout growth in recent years. At the same time, the improvement of the ranking and influence of Chinese universities has been steady and persistent, which we think is mainly driven by the highly-educated talents. Notably, in the Best Global Universities for Engineering made by US News, Tsinghua University is the top engineering university, which is the first time that a Chinese university has won the crown – meanwhile, four mainland China universities win top ten spots. These all indicate that China's highly-educated talent team is expanding rapidly.
Third, we found that China's educational sector emphasizes science and engineering subjects more than liberal art ones. Only 30% of China's universities provide liberal arts majors in undergraduate education, while over 80% provide science majors. This, we believe, also indirectly proves that the state attaches importance to and supports science and engineering, and the thought of developing through science and technology is deeply rooted in the minds of Chinese people.
Talent dividend drives advanced manufacturing
Obviously, talent dividends are crucial to the development of industrial and manufacturing, especially advanced areas. At the same time, industrial development provides a good material basis for further improving education levels, forming a positive feedback loop.
China's position in the global supply chain has changed dramatically in recent years: it has gradually become one of the centers of the worldwide supply chain. It can be seen from the chart that, in 2000, the global supply chain was mainly composed of centers in Germany, Japan, and the United States, with few transactions. However, after 2017, with China joining the WTO and experience a high-geared developing period, China replaced Japan as one of the centers and has become the largest one, and the trade with the other two centers increased dramatically. Considering China has already been flourishing in heavy industry and light industry areas before 2020, we believe that such changes are highly correlated with advanced manufacturing development and China will play a more significant role in the global supply chain.
The funds raised for advanced manufacturing companies can explain the developing trend, with more talents joining the advanced manufacturing industry. It can be seen from the chart that, in 2010, the number of financing events in the advanced manufacturing area accounted for about 10% of the total, which, we believe, is owing to the State Council's first proposal to promote the advanced manufacturing industry in Shanghai in 2009. After experiencing a period with no policy (around 2014), the proportion of advanced manufacturing financing events rebounded a decade ago. The amount of financing seems to prove our point better. Although the financing amount of advanced manufacturing has fluctuated dramatically in recent years, the overall curve shows an upward trend, reaching a historical high in 2020, accounting for 22.2% of the raised funding of all industries. This is highly related to the policies on advanced manufacturing intensively released in recent years and the advanced manufacturing support projects of provinces and cities. These policies also draw the attention of many new talents and encourage them to participate in the area.
In fact, China's talent dividend strategy is bearing fruit, especially in the field of manufacturing. Take Shenzhen as an example. Since the beginning of this century, electronics contract manufacturing factories have been appearing throughout the city. Through vigorously developing the manufacturing industry, especially advanced manufacturing, Shenzhen has become one of the cores of the world's manufacturing industry, over 30% of whose GDP is attributed by manufacturing companies. A noteworthy change is that, 20 years ago, Shenzhen had no well-known manufacturing brands and its export was dominated by world-famous brands, such as Nokia, Apple, and Dell, owing to the cheap labor force in the city. However, in recent years, many world-famous Chinese companies have been born in Shenzhen: Huawei and ZTE in the 5G communication industry, DJI Technology in the unmanned aerial vehicle (UAV) industry, and BYD in the automobile industry. In 2020, more than 34,000 companies applied for innovation patents in Shenzhen, including more than 10,000 high-tech and advanced manufacturing companies, accounting for nearly 30% and some of which have founders' parents being Shenzhen workers of the previous era.
We have always held that the mutual promotion of talent dividends and advanced manufacturing is reshaping China's industrial structure and indicates an essential clue for investment in China in the following developing stage.
Should we worry about China's aging society?
However, the aging society trap is a widely feared question when a country wants to turn a demographic dividend into a talent dividend as Japan did. Our answer is yes, we may have an aging problem, but not like Japan did. In other words, the situation of an aging society in China will be better than that in Japan, and there are three reasons.
Firstly, China's current level of science and technology is much higher than Japan then. According to the previous analysis of China's population structure, China is expected to enter an aging society in around 2030 (considering the proportion of the elderly population). However, compared with 1970 (Japan entered an aging society), the automation level of modern society has been improved by leaps and bounds, and more resources can be used to develop social welfare. China's compulsory and continuously reformed old-age insurance can prove this view.
Second, China is the only country covering all ISIC industrial categories globally, including 41 industrial classes, 191 categories, and 525 sub-categories. China can produce all kinds of industrial products from clothing, to aerospace, from raw materials to industrial machines, which has become an important source of China's competitiveness. This ensures that the internal circle model is feasible in China, making the redistribution of resources easier, and the welfare resources are better developed, especially for the elder population.
Third, China allows regional imbalance (with different functions), especially in the critical period of USD 10 thousand per capita GDP. The eastern coastal region of China focuses on independent innovation to drive China's economic development; the Northeast region is mainly responsible for national defense, food security, and energy security. The western and southwestern regions mainly focus on ecological protection and energy development; as an adaptor, the central region primarily focuses on the construction and maintenance of the industrial chain. This development model determines that after upgrading advanced manufacturing and advanced technology in the Eastern coastal region of China, the company's factories can be relocated to the other three regions for operation. This can also reduce the burden of social welfare. The working skills of the elderly group can be fully utilized in this mode when they choose to move to lower-tier cities or regions, making them 'talents' once more.
Based on the above three points, we believe that the situation of China's upcoming aging society is very different from that of Japan. It is a society that is still full of vitality with a high talent dividend and a proper endowment mechanism when relying on talent dividend instead of demographic dividend.
Bottom line
China's population structure and manufacturing structure are rapidly optimizing. Although the investment logic may change, China is still worth investing in.
Moreover, the critical point is that China mainly relies on the development of the real economy to become one of the world's new poles (as the two superpowers mentioned by UN Secretary-General Antonio Guterres last week), rather than relying on consumption and finance to enhance its national strength like the United States. In other words, the two countries have different political systems and development models. Secondly, China has few original innovations but strong executive power. The rise of China's infrastructure and express sectors are good examples. In contrast, the United States has many original creations, but its executive power is relatively weak. This also makes the two countries follow different developing paths. For investors who want to invest in China, it is crucial to understand China's unique development mode rather than strictly compare the developing paths of the two countries.
EqualOcean operates offices in Beijing, New York, and Shanghai. We welcome investors interested in the Chinese market to contact us via (contact@EqualOcean.com) or visit our offices. We believe the exchange of views will make you have a clearer prediction of the future.