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As leaders from the world’s wealthiest countries conclude the G20 Summit in China, Mohamed El-Erian and Michael Heise face off over China’s rising economic power. This is the second part of a two-part series.
China faces fundamental changes to its economy and society: The world’s most populous country is rapidly aging and will need to fortify its social safety net, which includes life- and health insurance and a broader pensions scheme, says Allianz Chief Economist Michael Heise.
The country’s industrial base, largely built on the premise of inexpensive labor and mass production, also seeks to catapult itself into the era of automation and cyber-physical systems, where robots and will replace assembly lines, says Mohamed El-Erian, the Chief Economic Advisor at Allianz.
Sound surprising? Risky? Not really, the economists say. Success will depend in part on strengthening the country’s social safety nets, including its health insurance and pensions schemes.
China has always needed to maintain a certain pace of economic growth to create new jobs for workers migrating to cities. With growth slowing now, are we looking at social unrest due to rising unemployment?
Michael Heise: There is always the risk of social tensions and discontent rising, especially if industrial activity and construction is too weak then many of these new arrivals without high qualification won't find jobs. But the size of the potential workforce, people aged from 15 to 59, is decreasing already; the workforce has begun to decline. Therefore, I don’t think such high growth rates are either necessary or sustainable in the long-term.
If you look over 10 to 20 years, the country will have to accept slower growth and it will have to cope with an increasing old age dependency ratio, meaning fewer working people have to finance the retirees. This is the combined result of the one child policy and rising life expectancy rates and the burden of caring for and funding the older people in China will be very significant.
The savings rate will continue to be high because of this demographic situation. And the government will need to further upgrade its social system which offers only very basic protection to people right now in health and pensions. But it will also have to be supplemented by a growing market for private provision of health and life insurance.
Even if you raise the retirement age from presently 60 to 65 by the middle of this century, the dependency ratio doesn’t reach a sustainable level. This is a huge challenge for the Chinese economy and policy makers.
It’s also a situation where we can expect strong growth in our markets, the life insurance markets, the health insurance markets and the asset management markets.
Mohamed A. El-Erian: That is a very important issue, and it is one that has political, social and economic dimensions.
Continued progress on strengthening social safety nets is an important element to China’s future. Politically, it is key to the implicit social contract that has evolved between the Chinese citizens and their political leaders. You can think of this as an equation involving the delivery of high inclusive growth against a slower democratic reform of the political system.
The strengthening of social safety nets is a very important element in anchoring this equation or, if you like, the social contract. It’s also very important because of the ongoing labor migration from state owned enterprises and rural areas to urban areas. Economically, it’s key to reforming the savings rate in China and accelerating the structural reforms that are part of the middle-income development transition.
Remember, what China is trying to do includes a gradually pivot from an investment- and export driven economy to a consumption driven economy. Part of that is convincing people to lower what has been an extremely high savings rate.
One of the reasons why people have saved so much is that they don’t have enough faith in the safety nets afforded to them: From pensions to s health. So they believe they have to take control themselves and self-insure. But we know from centuries of experience that excessive self- insurance is a very inefficient way to run society.
What about the potential for the insurance or the savings industries? How is that expected to grow in China?
Michael Heise: We expect very strong growth. This has been confirmed by the stunning growth rates in insurance in the first six months of 2016, especially in life and health insurance, but also in the normal property and casualty lines.
China is entering a new phase in terms of the insurance markets as well. In the first stage of development, usually the basic property and casualty deals are important. You have to insure your car and your house first and then once there is some prosperity in the economy, then you think about asset management and especially life and health insurance, and I think we have entered this phase. We are seeing over proportionate growth in Life and Health and the insurance penetration is still very, very low in these two segments.
We can be pretty sure that over the long term there will be very strong growth in the insurance markets in China. Our forecasts here haven’t changed materially despite a slight slowdown in the Chinese economy. The insurance markets are still going strong and by 2020 China will be the second largest life insurance market behind the United States. Growth is going to be very impressive.
China’s economic development plan is based in part on moving toward an Industry 4.0 approach, increasing automatization in manufacturing. How is that going to work in an economy that needs to promote job creation?
Mohamed A. El-Erian: China’s economic development has typically involved an element of technological leapfrogging – that is jumping to the most recent innovations rather than following the historical transition that some others took; and they try ensuring that the fruits of the resulting growth are shared as widely as possible. They do so while remaining open to new information, greater learning and mid-course corrections.
The approach there is not to give up jobs but, rather, to try to assure high productivity growth and then to deal with the redistribution challenges directly. The robot question you pose is just another example of the technological leapfrogging that China is known for.
Michael Heise: We often talk about the problems in China but a lot of things have been very well done. Look at the development of incomes and financial wealth. According to our calculations in the Allianz Global Wealth Report, which will be published soon, 550 million people in China rank among the global middle wealth class, which comprises all individuals holding net financial assets between 7,000 euros and 42,000 euros per capita. That means China has about half of the world’s total number of middle-wealth class people.
That is a major achievement for prosperity and it’s also a stabilizing factor for the economy. Despite all the tensions and risks, there is a huge mass of people that have grown into prosperity and who have potential to engage economically, people who have emerged from a subsistence economy. China can be credited with some major policy successes that should not be swept under the carpet.
Read part one here.
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