Who benefits from China's population decline?

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China's population decline is accelerating. Births in China will drop to record lows in 2023, accelerating its population decline. A possible economic drag sent Chinese stocks lower after Wednesday's figures were reported alongside weak asset data.

This change has serious implications for the economic condition of the country. This has thwarted predictions that China will soon overtake the US as the world's largest economy by 2020. But it's not all bad news. Some sectors are benefiting from Beijing's new policies to deal with changing demographic trends.

According to government data, the country's population fell by more than 2 million last year to 1.41 billion. The drop, more than double that of the previous year, was the result of both the lowest number of births since the founding of the People's Republic of China in 1949 and the highest death rate since 1974.

A major concern is falling labor supply and, as a result, higher wages. China is already facing labor shortages in its manufacturing sector as younger workers shun factory jobs. Average wages in China are expected to double in the decade to 2022, compared to Southeast Asian countries such as Thailand and Vietnam.

Still, the sheer size of China's aging population — one-fifth of the country's population will be 60 or older by 2022 — should indicate new growth sectors that are beginning to attract more funding.

Beijing this week seized on the initiative with plans to create a „silver economy” that offers products and services tailored to senior citizens, a market estimated to be worth trillions of dollars. Health-related consumption, from medical devices to pharmaceuticals, accounts for the largest share of spending among the elderly.

That push will welcome the biggest local biotech and pharma groups, including Jiangsu Hengrui, Wuxi Biologics, Shanghai Fosun Pharma and Sinopharma. These were affected by the industrial slowdown as the impact of Covid-19 eased. WuXi's shares have fallen 60 percent over the past year, while Fosun's has fallen nearly 40 percent. Part of the problem is that the sector became the target of Beijing's unprecedented anti-corruption campaign in August.

Another overlooked field is robotics. As the demand for automation in the manufacturing sector increases, top local robotics groups including Xiasun Robot & Automation and China Shanghai Step Electric will be the leading beneficiaries. The latter's shares, on an enterprise-value-to-sales basis, currently stand at just 2x, a discount to global peers.

The impact of China's shrinking population will reverberate around the global economy. But the next wave of investment opportunities should be created as government spending shifts to accommodate changing demographics and consumption trends.

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