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17 Sept 2024 | 5 minutes to read
China’s leadership announced plans last week to increase the state retirement age, while current economic activity data looks soft. The reform is the first change to the pension age since the 1950s, and sees the retirement age for men rise from 60 to 63, and for women from 50 to 55 or 58, depending on profession. The increase will be introduced progressively by birthdate.
The policy reflects growing pressure on the state for pension funding from an aging workforce. China’s 65+ years old cohort will move from 15% to 30% of the population over the next 25 years and life expectancy is also improving rapidly. While fertility levels are likely to have bottomed in 2023, the UN forecasts the fertility rate in China to reach only 1.39 by 2050, despite incentives to encourage larger families.
As a result, China has a worsening dependency ratio (the ratio of children and retired people to prime age workers) and a growing fiscal burden. China’s pension deficit has risen to more than 1.2 trillion RMB (approximately USD 166 bn), having been in surplus as recently as 2012, while fiscal subsidies to pension funding have risen to more than 6% of tax revenue, up from c.2.5% in 2014.
At the same time, pension provisions will likely need to be extended further if China is to support the on-going transition to a consumption-led economy from the investment-led growth enjoyed over the past decade and more. Already, the average pension replacement ratio (retirement income as a percentage of working income) is 44% compared to the OECD average of 62%, suggesting pension payments are not sufficient, and therefore likely weighing on consumer confidence.
While the changes to pension policy likely need to go further, they do show the direction of travel. De-risking local government finances was a key theme at this year’s Plenum, along with bolstering the social safety net, though China’s current economic travails make this harder to execute.
Current activity data remains weak. While credit growth remained stable in August, this was due to faster government bond issuance offsetting slower private credit activity, while the money supply contracted -7.3%, suggesting firms are saving rather than investing. Trade data was also soft. Export growth accelerated to 8.7%, boosted by the tech cycle, but import growth declined to 0.5%, with commodities especially soft.
Without further stimulus measures, Chinese GDP growth is likely to miss the government’s own 5% GDP target.
Ahead of this week’s meeting of the interest rate setting Federal Open Markets Committee (FOMC), the trend of economic data remains very much in focus for the US Federal Reserve (Fed). The Fed is almost certain to cut rates in September, but the question is now “by how much?” The July FOMC minutes confirmed that committee members were prepared to cut by 25bps in September, but has recent market volatility and economic data made the case for a 50bps cut?
August inflation data was a smidge stronger than expected. Headline Consumer Prices Index (CPI) inflation slowed from 2.9% to 2.5% but, on a monthly basis, core inflation picked up to 0.3% from 0.2%. This was primarily due to a pickup in shelter costs, which make up a third of the basket, with around 40% of the basket slipping into disinflationary territory. While FOMC members will continue to monitor housing costs, leading indicators imply these should continue to ease, so inflation is not currently causing the Fed a headache.
On the other side of the mandate, softer labour market data remains a more serious concern, though last week’s initial jobless claims data pointed to a stabilisation in employment. Initial jobless claims edged modestly higher to 230,000 in the week to 7 September, though the unadjusted (not seasonally adjusted) number declined to 177,000.
While the market continues to price in a 25bps cut from the Fed this week, FOMC members have made it clear that they do not welcome further labour market easing, making 50bps possible. At the same time, market pricing indicates that rates will be cut by 200bps by next summer, which would take the Fed Funds close to the level the Fed considered to be the neutral rate. While some meaningful rate cutting is possible, this pricing looks demanding, given that the economy is cooling relatively gradually. This could be a source of volatility if markets reprice.
Closer to home, the Bank of England (BoE) is expected to leave interest rates unchanged at the September meeting, having cut by 25bps in August. The market currently prices in less cutting than in the US, reflecting the continued resilience of the economy.
July GDP figures showed 0% growth over the month, but this mostly relates to erratic sectors, with commodities and industrial output falling, and auto plants retooling for new models. Elsewhere, services output recovered, with better weather and fewer strike days helping activity.
Looking at employment, the headline rate dropped to 4.1%, though low participation make the usefulness of the labour survey data hard to judge. Other data suggests continued gradual easing, with wage growth continuing to slow across sectors and private sector regular pay growth slowing to 6% year-on-year.
Altogether, while the Bank rate is still in restrictive territory, leaving ample room for further monetary easing, economic data does not yet make the case for an aggressive move.
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