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Reasons for a China Slowdown Not What You May Think

An inevitable slowdown in the Chinese economy may be attributed to a range of reasons from headwinds in global growth to a maturing economy, but some analysts believe changing demographics may be the Achilles’ heel to China’s growth.

An elderly Chinese woman with her grandchildren make their way along a slum area where they live in Hefei, east China's Anhui province on May 21, 2011. China has vowed to more than double land supply for low-cost housing in 2011, an apparent effort to ease social tensions over high home prices and atone for missing a similar target in 2010.
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An elderly Chinese woman with her grandchildren make their way along a slum area where they live in Hefei, east China's Anhui province on May 21, 2011. China has vowed to more than double land supply for low-cost housing in 2011, an apparent effort to ease social tensions over high home prices and atone for missing a similar target in 2010.

Michael Yoshikami, Founder & CEO of YCMNET Advisors says the nation’s aging population, exacerbated by its single-child policy, will challenge the government’s push to bolster consumption as a new engine for growth.

“The only way China is going to be able to overcome the reduction in exports… is internal consumption. [But] the more [the] Chinese population ages, that's more of a headwind against internal consumption,” Yoshikami said.

“There're studies out that suggest the Chinese aging population is going to skyrocket particularly as a result of the one child rule.”

According to Lombard Street Research and the Economist Intelligence Unit, the number of Chinese aged over 60 stood at 178 million or 12.5 percent of the total population in 2010, and that figure is expected to double by 2030.

After a decade of double-digit growth, Yoshikami says markets should get used to expansion in the single-digits for the mainland economy.

“China is already at a point where it's grown so much I think the expectations for Chinese growth should really be ratcheted down, they've been accustomed to growing at 14, 15 percent a year,” said Yoshikami.

“We see the recent numbers at 9 percent, I think eventually that number is going to go down [to] more than 7 percent.”

Stephen Green, Standard Chartered's Head of Greater China Research says China’s economic expansion will slow to 7 percent by 2020, hurt by shrinking growth in the country’s labor pool, which he expects will show negative growth in less than 10 years.

"We are already seeing much slower labor force growth," said Green. "Over the next 10 years, maybe 2 to 3 million net new workers coming to the labor force now each year, compared to 5, 10 million in the next decade."

Even so, Yoshikami isn’t writing off China as an investment just yet. He says investors will just need to temper their expectations and view the economy as a "slower growth emerging market".

"You have to understand that if you want high growth, you should not just automatically invest in the overall Chinese economy." Instead, he said, investors should look at specific industries such as education.

"I still think it makes sense to buy China," he concluded.