The easiest – and admittedly also the most misleading – justification for going to China with your new healthcare business idea is the country’s demographic trends. The makes a compelling case for believing that whatever other unknowns and uncertainties your business model will need to adapt itself to, success is an inevitability. In many ways, this is one of the essential conundrums of vetting large investments in China: behind every sector-specific person warning of and under-utilization there are a long line of China generalists who point towards the country’s size, its rapidly accumulating wealth, and its enormous internal momentum as signs that no such thing as over-building could be possible. Healthcare is not above this sort of analytical oversight; in fact, healthcare business opportunities in China may be overlooking some very important .
China’s demographics certainly point towards the opportunities healthcare investors might be able to take advantage of: a rapidly aging population coupled to the one-child policy stand as primary support of the eldercare business opportunity. Similarly, the many gaps in the public hospital system (where both lack of fundamental coverage and sub-par coverage where it does exist are prevalent across the country), act as incentives to Western investors interested in building private hospitals and clinics. These are both opportunities that demographic trends strongly suggest outside investors should be seriously looking into (and, as we have discussed on this blog, they are).
But there are also long-tail risks that need to be taken into account, some of which the same demographics illuminate. The Center for Strategic & International Studies (CSIS) along with the published a report titled “”. This section captured in my mind the perfect combination of the opportunity and the risk inherent in China’s demographics: “In 2005, there were just 16 elderly Chinese for every 100 working-age adults. This aged dependency ratio is due to double to 32 by 2025, then double again to 61 by 2050. By the mid-2020s, China will be adding 10 million elders to its population each year, even as it loses 7 million working-age adults.”
Reading this through the eyes of potential investors, this sort of adjusted payer-payee relationship suggests needs – and the requisite opportunities needs always bring with them – in areas like health care, eldercare, and pensions. But, this sort of demographic adjustment also brings with it long tail risk. Much later in the , the authors write that “China has been ‘ while its demographics have leaned with economic growth. But by the 2020s, demographic trends may be weakening the two principal pillars of the government’s political legitimacy – rapidly rising living standards and social stability. Not just a retirement crisis, but also a more general social and economic crisis may loom in China’s future.” (emphasis mine)
, of the , has a similar perspective to offer. Writing in his January 2011 report “”, he says, “China is confronting the demographic version of ‘the perfect storm’. Impressive as China’s economic accomplishments have been, these new demographic realities may ultimately force us to revise today’s received wisdom about the future of China’s economic growth.” He writes later in his paper that “China’s troublesome demographic trends over the decades immediately ahead, moreover, are by now essentially immutable.” (emphasis mine)
What does all this mean for healthcare investments in China? To coin a phrase: demographics giveth, and demographics taketh away. Current linear projections about China’s growth are unlikely to be proven accurate. It is an economy that will ultimately in the not-too-distant future face a structural crisis of its own making. In the aftermath of this crisis, many of the certainties that have gone into the financial models behind healthcare investments in China will be turned on their head. Some investments will survive this adjustment because they have, at their core, not just demographics playing to their advantage, but deeper insights into cultural, social and developmental challenges that their business model embraces and turns into core competencies.
Regardless, investors in China healthcare need to be thinking now about long tail risks, and nowhere is this perhaps easier to do than with respect to demographics: just as China’s demographics illuminate possible opportunities, they also suggest structural risks. Long tail risks in developing economies include, but are not limited to, of your investments, regulation designed to prohibit expansion or , the role might play in recouping your investment, and the “inevitability” that China will have a . None of this is to say that China is the wrong place to be making investments – but it is to remind us all that just as China’s demographic trends hint at opportunities, they also speak to risks, ones the wise investor will seek to understand prior to making an investment in the country.
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