[Note: below is Chapter 18 from Great Wall of Numbers]
While there have been a number of reforms in the past three decades, another potential headwind that Chinese policy makers will increasingly face in the future are financial burdens and pressures from entitlement programs such as its social security and health care. In fact, one common misunderstanding many Western analysts have is that during the introduction of market reforms state subsidized living has been phased out.
While it is true that the monolithic cradle-to-grave “iron rice bowls” (铁饭碗) structure has been somewhat liberalized, the shortfall in funding the public pension system will still hit $2.87 trillion this year. In fact, according to Cao Yuanzheng of the Bank of China, “[s]uppose the annual rate of GDP growth was 6 percent. China’s pension shortfall would reach 68.2 trillion yuan by 2033, accounting for 38.7 percent of the year’s GDP.”
One of the reasons for the marked increase is, as I mentioned in Chapter 6, that the life expectancy in China has grown from 65 in 1976 to 73 in 2010. And because of the one-child policy, ceteris parebus, the population is likely to peak within the next 20 years. Thus assuming the retirement age is not increased, by 2050, it is estimated that 31% of China’s population will near the age retirement age; and within 40 years China will have nearly 500 million elderly people. In contrast, today about 14.8% of China’s population is over the age of 60. And according to Li Jun of the Chinese Academy of Social Sciences, “by 2050, China’s working age population (aged 15-59), will be reduced to 710 million, a staggering 230 million less than in 2010.” In fact, the Chinese working-age labor force itself shrank by 3.45 million in 2012, a decline that is expected to continue into the future.
Under the current system men are eligible for public retirement benefits beginning at the age of 60 and women at state-owned enterprises can retire at 55 (women in private industry can start receiving benefits at 50). Thus in an attempt to alleviate the stress on the system in June 2012 one proposed reform openly discussed in Beijing was to raise the retirement age beginning in 2016 – increasing the required age one year on alternating years – creating a uniform retirement age of 65 by 2045. Yet such proposals have also proven to be resolutely unpopular with younger generations. For example, one poll from People’s Daily this past June found that 93.3% of the 450,000 respondents voted against raising the retirement age.
Pension costs and opportunities
Irrespective of the stated goals in universal health care programs, economic laws such as supply, demand and scarcity are immutable. Hospitals, medicine, medical equipment and doctors are all scarce, finite resources. Whereas a free market would ration these resources via prices which arise from interaction between market participants, national health care plans ultimately involve some price distortions (e.g., subsidies) that invariably create artificial shortages and/or oversupply. Or rather, there is no such thing as a free lunch, ultimately someone has to pay. And any activity that is discounted financially (e.g., subsidized) will ceteris parebus be consumed more. While a significant portion of the political class and electorate on each hemisphere are increasingly fond of universal health care “for free” – the underlying finances of these entitlement programs will become markedly burdensome in the long run. China is no different and there may be opportunities for NGOs and foreign businesses to plug into the holes and gaps that are not covered by state programs.
China’s 11th Five year plan (2006-2010) included a number of health care reform provisions. One provision included extending subsidized healthcare to every Chinese citizen by 2020. On January 21, 2009, China’s State Council signed off on this plan which was further expanded in the new 12th Five year plan (2011-2015). In the three years since these provisions were enacted, over 1.5 trillion yuan ($240 billion) has been spent in the medical sector. According to one estimate roughly 95% of the populace now has access to “basic health care.”
As noted in Chapter 6, there are a number of opportunities for both foreign and domestic health care professionals, pharmaceuticals and medical supply companies to find new opportunities in this growing industry. For example, medical equipment companies such as QIAGEN, which makes medical diagnostic equipment (e.g., blood tests), have found a new revenue source from the 33,000 hospitals and clinics that have been financed as part of this new government plan. In fact according to one estimate in 2010, the medical device market on the mainland alone is worth roughly $11 billion, “with a compound annual growth rate of 30.6 percent in revenue.”
At the same time, while it is difficult to predict how long the health care sector will continue receiving subsidies from governmental bodies, because of the rapidly aging population and because the elderly typically spend significantly more on health care, even if the level of subsidies remain this aging process will place challenges on the system in the long-run. Challenges that have the potential to be turned into opportunities. For example, the World Health Organization estimates that 28% of people older than 15 are smokers – that there are approximately 330-350 million smokers in China. 40% of the world’s smokers reside in China and roughly 60% of all adult men smoke (compared with 4.2% of women). Yet despite various health campaigns and public service announcements highlighting the dangers of smoking and second-hand smoking, there are a number of incentives that prevent this activity from being purged. For instance, at $18.7 billion in 2010, China National Tobacco (a SOE) generated more profit than either HSBC or Walmart. For perspective, in terms of worldwide sales, China National Tobacco has a commanding 40.6% on cigarette sales globally (Philip Morris has 14.9%). Furthermore, the tax revenue generated by tobacco sales was more than $95 billion in 2011 and $137 billion in 2012. Cigarette sales in China are expected to grow 13.5% a year and reach 2 trillion RMB ($321 billion) by 2016. Yet arguably these direct incentives (tax revenues) probably do not offset the medical expenses and costs that government bodies will eventually pay for in medical care for smokers as they age.
Case in point, each year on the mainland there are around 1.2 million smoking-related deaths (such as chronic obstructive pulmonary disease (COPD)), a number that is expected to increase to 3 million by 2030. What are the financial costs?
While smoking-related deaths and illnesses may not have the same direct economic consequences as HIV/AIDS has had on south African countries like Botswana — the economic impacts are both pronounced. HIV/AIDS struck significant portions of Botswana’s able-bodied working-aged populations, stunting the country’s economic performance. Likewise, while the effects of smoking are more pronounced and detrimental in later stages of life, the total health care costs borne by friends and relatives (and insurance) will create an economic headwind considering that the funeral bills, hospital visits, treatments and medicine for 3 million individuals must be borne by someone.
For perspective, the roughly 42,000 people that die in the US each year due to second-hand smoke represent $6.6 billion in lost productivity. And according to a recent study in the US, on top of Medicare subsidies, more than three quarters of households spent at least $10,000 in out-of-pocket expenses in the last five years of life. While both the level and costs of care in China are still significantly lower than those in the US, there are 202 million Chinese aged over 60 a number that will double by 2030. Thus the increased costs borne by one or more parties will be increasingly substantial in the decades to come. In fact, by 2015 it is estimated that in China “a decade of costs tied to health care and losses of productivity from diseases such as diabetes and heart disease are expected to reach as high as $550 billion.” Or conversely, according to the World Bank by reducing deaths in China from heart disease and stroke (which smoking contributes to) by 1% a year this could, “generate economic value equal to 68 percent of China’s 2010 real gross domestic product, or $10.7 trillion.”
Compounding this issue is the one-child policy along with the Confucian ideal of ‘filial piety’ (e.g., children care for their parents as they grow older). For example, one source I spoke to explained that because many parents are dependent on their children to support them when they retire, that the death of their only child can be devastating both emotionally and financially. In fact, according to this source, in the event that an only child dies, those living in rural regions typically do not have access to any other social safety nets; that the only stipend they may receive from 3rd parties is a 50 RMB ($8) a month from the local government. The Ministry of Health (now the National Health and Family Planning Commission) estimates that “at least 1 million families had lost their only children by 2010” and many of those parents are too old to have another. Ren Yuan, a professor at Fudan University, has a higher estimate of 10 million families who have suffered this loss, including 300,000 in Shanghai. This then presents an opportunity for both domestic and foreign NGOs, to provide assistance to these at-risk demographic segments (see below for examples).
And again, this presents opportunities to both foreign and domestic health care providers and medical device manufacturers to help provide care for COPD and emphysema as well as Alzheimer’s (as mentioned in Chapter 6, China has the largest population of Alzheimer’s sufferers). How else do these policies also impact foreigners?
Retiring on the mainland
Under a series of new laws and regulations passed in the last year, foreigners who have spent at least 15 years collectively (not necessarily sequentially) are allowed to retire on the mainland. At the same time, the new laws which went into effect October 15, 2011 also requires employers to levy similar social security taxes on foreign workers, even if those workers have no plans to retire on the mainland (similar to FICA taxes in the US which are levied irrespective of nationality). Yet there are additional reforms on the drawing table. For example, under new regulations announced on December 11, 2012 foreigners “who obtain permanent residency will have the same pension, employment and property rights as Chinese citizens.” This also includes social insurance benefits (e.g., medical, unemployment) and simplifies investment and registration procedures for starting up a new business.
According to the Social Security Administration, about 350,000 American retirees who receive Social Security benefits do so “in countries other than the U.S.” While the majority of those retirees live in Europe, Canada and Mexico I have met several dozen retirees working at various institutions in China in various capacities (e.g., teachers, health care consultants, accountants). While there is an official age cut-off limit of 70 years enforced at many of these institutions, there are still a number of part-time and NGO opportunities that are open irrespective of your age.
Because the costs of living are typically substantially less in provinces further inland (relative to their home countries), one possibility for retired Westerners – irrespective of whether or not they have worked in China previously – is to work as foreign experts at education and cultural institutions. For example, Irvin Abercrombie of California (see below) previously worked as a process design and industrial distribution engineer at various sites across the US. Since his retirement he has spent the past eight years working at colleges and schools across China. And as I mentioned in Chapter 9, more than 100,000 foreigners are hired each year to work in the EFL industry alone on the mainland.
Following its admission into the WTO, foreign companies were allowed to set up joint ventures on the mainland. As a consequence, dozens of foreign-funded insurance companies are doing business across the country. The largest foreign insurance firm is AIA, who holds about 1% market share on the mainland. The aggregate of all foreign firms is below 5% in the life insurance market and about 1% in property and casualty. Yet even with that relatively small amount, according to Mark Kellock an analyst at Barclays Capital, “that [1%] sliver still accounts for 8% of all its [AIA] new business.” For comparison, China Life is the largest Chinese insurance company, with about 33% marketshare and generated almost $60 billion in revenue in 2011.
And because of a relatively low penetration rate of around 4% overall, the life insurance sector doubled between 2007 and 2010. Altogether premiums revenue reached around $220 billion in 2010. For comparison, in 2009, the US insurance industry generated $934 billion in premiums. The world wide insurance market generated just over $4 trillion in 2010 with European firms accounting for 35.4% of the total market share. And Swiss Re projects that both life and non-life insurance premiums will grow in China about 9% a year until 2020.
Yet this industry is not a get-rich-quick market. According to Moody’s, of the then-47 foreign insurance companies in China, only 11 made a profit in 2010. In fact, in 2011 the annualized return on investment for the insurance industry declined by 3.6%. Similarly in 2012, the 26 joint Sino-foreign insurance ventures as a whole collected a mere 47.5 billion RMB ($7.61 billion) which is roughly 4.7% of marketshare, down from 8% in 2007. The lower joint-venture numbers are a result of exits and liquidations by partners leaving the market. Unsurprisingly, according to PricewaterhouseCoopers, the top three industry challenges include regulatory uncertainties, market shakeout (along with entry by domestic banks) and “finding and keeping good personnel.” These are essentially the same issues that all open industries throughout China face.
What this means is that for foreign firms and individuals with experience in all forms of insurance, actuarial and re-insurance industries have the potential to find new growth opportunities due to the relatively low penetration rate (4% as noted above).
Non-profits and NGOs
On May 12, 2008, approximately 69,000 people were killed during the deadliest earthquake that has hit China in the past 30 years. Subsequently, aid and donations (totaling $11.2 billion) from around China and the world poured into Sichuan, the epicenter of the disaster zone. Yet after the dust settled, several investigations discovered that various organizations and institutions had siphoned off tens of millions of dollars due to a lack of transparency and accountability. In fact, the Red Cross Society of China (RCSC) itself failed to collect the funds donated to drop boxes placed throughout several hundred locations around China – four years after the quake.
One of the reasons has to do with institutional administration. In June 2011, a businessman on the board of the RCSC was discovered to have diverted charity money to his girlfriend, Guo Meimei, who in turn spent the funds on a Maserati, business-class airline seats and handbags from Hermès (she posted pictures of it all on Sina Weibo). This created a scandal that resulted in a shakeup of the organization and created public backlash that has lowered trust in such organizations. In fact, according to China Daily, “90 percent of the people surveyed said that they will not donate to RCSC any more.” And due to the perceived corruption within the sector and long-held cynicism subsequent donations fell that summer by 80% – impacting every charity on the mainland.
According to official statistics there are technically 425,000 “social organizations,” however only about 1,000 organizations that are typically considered NGOs (e.g., environmental, women’s rights, anti-discrimination). And while there are the usual series of hurdles and challenges that all participants face, the relatively few NGOs presents an opportunity for both foreign and domestic firms and individuals.
Ecotourism and agritourism
In November 2012 I spoke with Irvin Abercrombie who is originally from California and retired as an industrial designer eight years ago. He has since spent nearly all of the subsequent time working in various capacities in the education industry on the mainland. In 2007 he co-founded Dragon Lake Keepers with Pat Sullivan (see Chapter 9), an environmental group located in Anhui. According to him, “I initially started this group informally with students at a local college I was teaching at. I was surprised by the relatively large quantities of litter that was piled on the side of roads and wanted to lead by example, so each week I would take a group of volunteers to a nearby lake called Longhu (Dragon Lake) and we would literally pick up the trash with our hands. Word quickly spread that a foreigner was voluntarily picking up the rubbish that most people do not think twice about before they drop. Subsequently we were interviewed by a number of media outlets including a Huainan television station (a neighboring city) to find out our motivations. And as a consequence we quickly restructured our group into a formal organization that includes support from the IFED (now PCDN) and even have t-shirts and a theme song.” PCDN is the Peace & Collaborative Development Network an NGO specializing in connecting professionals in areas such as conflict resolution and international development.
What Abercrombie is describing is an environmental issue that has been moved to the forefront of policy making discussions. While it is hard to fully quantify the impact of environmental pollution (due to a number of variables), a recent MIT study published earlier in 2012 estimated that the lost labor and increased health care from air pollution “cost the Chinese economy $112 billion in 2005.” A World Bank study published in 2007 found that “the health costs of air and water pollution in China amount to about 4.3 percent of its GDP.” The Asian Development Bank says “air pollution could be imposing annual economic costs equivalent to as much as 1.2 per cent of the size of the economy.” During January 2013, breathing the air in cities such as Beijing was likened to living in a smoking lounge or smoking the equivalent of 21 cigarettes (Guangzhou’s air was equivalent to 25 cigarettes and Shanghai was at 9). As an unintended consequence, one of the business opportunities for domestic and foreign businesses is to sell air purifiers. For example, Philips electronics recently posted sales growth of 300% over the past several months and “their two most popular models have been out of stock for most of January.” Yuan Da, a Chinese firm that makes air purifiers sold 3.5 million units online in January 2013 compared with 1 million in October 2012. In addition to selling face masks, air purifiers and even cans of bottled air, another opportunity is building “pollution domes” above recreational facilities to wall off airborne dust such as those above international schools in Beijing. Or to take a page from Chapter 13, air quality monitoring apps for smartphones have become quite popular, with one developer – Wang Jung – seeing 58,000 downloads of his app in one day (up from a mere 1,000 it typically gets).
In the run up to the 2008 Beijing Olympic games, between $17 billion and $32 billion was spent creating a “greener” environment surrounding the city (e.g., closing down factories, creating parks). This is an ongoing process as between 2011 and 2015 various institutions and governmental departments plan to spend $56 billion to cut the level of harmful particles in the air (e.g., PM 2.5 particles). This past year these particles were estimated to cause the deaths of approximately 8,500 residents “in Shanghai, Guangzhou, Xi’an and Beijing [which] has led to a total economic loss of 6.8 billion yuan ($1.09 billion).” It is not just air either as an estimated “57% of China’s urban underground water is polluted” and roughly half of the cities are left with drinking water that fails to meet acceptable hygienic standards. According to the Ministry of Land and Resources, “heavy metal pollution results in the loss of 10 million metric tons of grain and the contamination of another 12 million metric tons annually, incurring 20 billion yuan [$3.2 billion] in direct economic losses each year.” And while there are a number of reasons why this pollution takes place including a tragedy of the commons and lack of clear property rights enforcement, organizations like Dragon Lake Keepers can provide a service that is currently in short supply.
In fact, Abercrombie’s long-term goal with the organization includes not just cleaning and educational workshops but also ecotourism and agritourism. For example, “I helped put together a business plan that would allow English-speaking students to act as tour guides for foreign tourists who are interested in the surrounding historical sites and agricultural produce. The city of Bozhou is nearby and it is the home to TCM [Traditional Chinese Medicine]; Zhu Yuanzhang (the ‘poor emperor’) was born in a neighboring county; there is a local vineyard that produces some of the most popular wines sold on the mainland; and there are even fresh water pearls cultivated in Dragon Lake itself.” Yet one of the challenges that Abercrombie and others face elsewhere is receiving proper government support and certification. According to him, “unfortunately the agritourism and ecotourism plans did not pan out in part because we did not have the clout and guanxi needed with local authorities and because we had intended to pay the students. And once money is involved, taxes and regulations come into play. And since we are foreigners trying to help spearhead this endeavor, it has unfortunately been tabled for the past year.” Thus his advice to foreigners and foreign NGOs is to make sure volunteer organizations remain completely Chinese led, treat it as a school or community project and do not involve profits or financial gains until later phases.
In terms of overcoming challenges, according to one NGO source I spoke with, “there are a few notable organizations that have obtained NGO status in China including Operation Smile, Roots n Shoots, World Wildlife Fund, Habitat for Humanity and Ciwei in Shenzhen. There are several reasons why they have succeeded where others have not. For instance, with the help of Jackie Chan’s celebrity status, Operation Smile was eventually granted permission to become an NGO. Another reason is that there are issues that seem to be less sensitive – like the environment and animal protection (MarineDream, SeaTurtles911, EcoDesign Fair) – that have a little more wiggle room in terms of operating in the NGO segment on the mainland. In addition, the role of the private sector in funding NGOs is relatively foreign. Charity contributions and CSR (Corporate Social Responsibility) are still new ideas to companies in China so this may take some time to become accepted. Another area is grassroots campaigns. Over the past five years an increasing amount of Chinese students and younger people have begun looking for ways to do charity work. BEAN and Greennovate are two examples of NGOs that have managed to reach into the Chinese community through Weibo and other social media.” Ciwei Philanthropy Institute operates a school for 132 students whose parents are migrant workers and have been unable to receive a hukou (household registration) in Shenzhen. Only holders of certain hukou can have access to public institutions like schools.
And one other area for opportunities that Abercrombie discussed involves a nascent segment called agritourism in which tourists pay visits to farms and ranches – to experience a rural lifestyle. While this is relatively non-existent on the mainland, for comparison, according to Rural Bounty, an agricultural membership organization, there are 65,000 farms and ranches that are open to the public in North America. A 2007 US Department of Agriculture estimated that 23,000 farms offered agritourism activities, “bringing in an average of $24,300 each in additional income.” According to the same study, California which is the largest farm state in the US had, “nearly 700 farms averaging more than $50,000 in agritourism income.” In fact, according to a survey from the University of California, “California farmers and ranchers hosted more than 2.4 million agricultural tourists in 2008.” And one farm in Florida charges $1,500 a night for groups to participate in culinary retreats that include, “handcrafted beds topped with bamboo sheets, a five-course organic dinner and breakfast and lessons on how to prepare meals using farm-raised, hormone-free livestock, eggs and produce.”
Or in other words, Chinese farms and ranches such as those in Anhui are leaving a lot of money on the table by not utilizing this new type of tourism.
There are also nearly 900 US farms and ranches that participate in the germinating ‘farm stay’ subindustry – which are distinguishable from traditional bed & breakfasts as they include activities like farm-based cooking classes. These classes “can cost $25 to $2,000 per person, depending on the location and chef—usually start in a field, barn or greenhouse. Students harvest vegetables, milk cows and goats, and gather eggs.” Thus entrepreneurs and businesspeople with experience in ecotourism and agritourism (e.g., guides to Nappa Valley wineries) may eventually find new opportunities on the mainland including rural Anhui.
Other areas of the mainland have accepted and adapted to this new industry. According to China Daily, “[h]ouses have been built for tourists to rent in attractive locations in the countryside in Zhejiang province, more than 90 percent of which have received investment from private capital. They make up to a 20 percent annual return.” Thus perhaps it may be only a matter of time until inland holdouts allow these tourism industries to grow as well. Simultaneously firms that specialize in air purification and air treatment goods and services will find new opportunities as the goal of cleaner air is being pushed at all levels of Chinese society.
Takeaway: The financial costs – and the burdens – for entitlement programs in the West offer an increasingly important illustration of the entitlements being offered in China as well. Over the past several years Chinese policy makers have enacted a number of reforms that have increased spending on health care access and public pensions. While both domestic and foreign firms can find new opportunities in this market, the sustainability and solvency of such government programs remains unclear. At the same time, because of new laws passed over the past year, foreign experts looking to retire overseas now have fewer legal hurdles on the mainland than before.