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China will get old well before it gets rich

Guang Niu - Getty Images

Contrarian investors looking for a reason to believe China will not become an economic superpower need to look no further than the country's looming demographic disaster.

China's much-lauded development model has emphasized massive infrastructure investments funded through the capture of increasingly large swaths of the global supply chain of manufactured goods.

Key to this model's success have been policies designed to attract foreign direct investment (FDI), government subsidies for key industries, and an inexpensive labor force eager to migrate from urban to rural areas in pursuit of economic opportunity.

(Read more: Factory 'boys': the changing face of China's production)

But China's economic growth has also taken advantage of its demographic dividend, a unique moment in time during which China's fertility rates dropped due to the one-child policy, while life expectancy increased through access to more modern healthcare. The net result was more workers entering the labor market, with fewer elderly in need of support.

The ongoing enforcement of the country's one-child policy means its once young and vibrant labor force will soon transition from contributing to China's economy, towards needing to draw resources out of the country's thinly supported pension and healthcare systems.

(Read more:China's solution to elderly neglect: Sue your kids)

The full implications of this are only now beginning to be felt. What most policy makers now realize is that the one-child has set in motion a reversal of China's demographic dividend that should cast suspicion on the inevitability of the country's economic ascent.

Beginning in 2012, China's demographic dividend came to a dramatic end. Last year, demographers in China estimate 3.45 million laborers aged out of what is considered the optimum working age group of between 15-59 years of age.

Both the number and the speed of laborers exiting the workforce will gradually pick up speed over the course of the next several years, until by 2050 nearly 22 percent of China's population will be over 65 years of age.

(Read more: The aging in Asia face a decade like no other)

Today, the worker to elderly dependent ratio in China is 16:100; by 2050 it will be 64:100. Beijing already has 1.7 million elderly 65 and older; Shanghai 2.3 million.

The cities that were the first to benefit from China's economic renaissance are now the first to face the unpleasant demographic realities of policies that in previous years seemed perfectly sensible, but for the next several decades pose the most foundational questions to the viability of the Chinese economic development model.

Japan, Hong Kong and Singapore all got rich well before they got old. China, on the other hand, will get old well before it gets rich. Among the handful of key issues that could derail China's economic growth is not only the speed with which the country is aging out of its demographic dividend, but also the profound gaps that remain in terms of pensions and basic healthcare that address cost effective long-term care management of chronic disease.

(Read more: Here's China's solution to elderly neglect)

The Chinese government understands the economic and political implications of the country's aging trends, which explains its aggressive moves to increase funding for healthcare and senior services, at the same time it moves to open the country's healthcare and senior care economies to foreign investment and expertise.

Beginning with a healthcare stimulus of $208 billion in 2009, the country has embarked on a massive investment in its healthcare infrastructure.

The Ministry of Health has taken steps to make it easier to bring foreign investment into the hospital and healthcare market, most notably setting the goal to see an increase of patient visits in privately owned hospitals from 8 percent to 20 percent between 2012 and 2015.

In addition, China's FDI Catalog was revised in early 2012 to allow in theory for wholly foreign owned entities of hospitals. Over the course of the last several years, the senior care sector in China has benefited from increased attention and investment by a variety of U.S. and European operators who are eager to tap into the combined energies of China's public and private sectors, and their respective appetite for healthcare and senior care products and services.

(Read more: In space-starved Hong Kong, the elderly struggle for shelter)

These measures are designed to accomplish a couple of objectives. First, the Chinese government is concerned, as evidenced by the explicit policy goals in the 12th Five Year Plan, that inadequate healthcare coverage is preventing consumers from discretionary spending. The thinking goes that if the government can expand the social safety net, average Chinese families will save less and spend more.

The second objective is to get out in front of the social anxieties and potential turmoil that could spread across the country if families begin to feel all their hard work has not translated into better healthcare, pensions and long-term care for the elderly.

As the massive demographic dividend that propelled China's economy forward has come to an end, the country faces the unfortunate implications of its one-child policy. Whether the economic power China has accumulated over the last thirty years will be adequate to fund its growing pension and healthcare costs may be one of the most important questions policy makers in China must wrestle with and resolve.

In the short-term, the country's demographic realities will create opportunities for international senior care and healthcare operators; however, in the mid-to-long term the ability to view China as a market for products and services may hinge on the country developing an alternative economic model that successfully takes advantage of more than a low-cost workforce.

Whether the country's central planners have tools at their disposal to design such an option remains to be seen.

Benjamin Shobert is the Founder and Managing Director of Rubicon Strategy Group (www.RubiconStrategyGroup.com), a consulting firm that provides market access strategy for healthcare companies entering emerging economies.

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