China's Pension Challenge: A Sleeping Dragon

Implications: China's pension issues are real.

The question is, "How will China's government address the pension issues?"

Watch out.  Changes must be forthcoming.

Analysis: There are two realities that face China's government.
1.    The future must evolve from a controlled economy to a market economy.
2.    The market economy of the future must pay the enormous costs accrued by the controlled economy of the past (i.e., legacy costs).

There is no better example of this fact than pension and health care obligations.  The liabilities of these programs are so large they are difficult to accurately forecast.   Yet it is the future generations that must pay for these obligations.  (Note:  This challenge is magnified by the shifting demographics of China, e.g., one-child policy.)

Thus comes three questions.
1.    Does the Chinese government understand and recognize this challenge?
2.    Will the Chinese government address this challenge?
3.    How will the Chinese government address this challenge?

The answer to the first question is "YES."  Given this answer, the answer to the second question is "YES."  If they do not do so, China will implode due to social unrest.  Which brings us to the third question of "how."  The world is uncertain about the answer.  China must fund its pension promises.   Actions may include significantly higher taxes on market based activities, wealth, exports, etc.  The world just doesn't know.

In summary China is full of opportunities, but also full of legacy costs.  There is no bigger legacy cost than China's pension and health costs programs.  Investors must be sensitive to China's past and present, as well as its future. 


Note: Realize that newly privatized companies in China must have defined contribution plans, not defined benefit plans.