The EconomistNovember 2nd 2019 Finance & economics 652
1sion payouts to retired people overtook
contributions by workers in 2014. Accord-
ing to the Chinese Academy of Social Sci-
ences, the national pension fund could run
out of money by 2035. The finance ministry
is taking small steps to shore the system
up: in September it transferred 10% of its
stakes in four giant state-owned financial
firms to the fund. But far more is needed.
Government spending on pensions and
health care is about a tenth of gdp, just over
half the level usual in older, wealthier
countries, which themselves will have to
spend more as they get even older.
The second impact is on growth. Some
Chinese economists—notably Justin Lin of
Peking University—maintain that ageing
need not slow the country down, in part
thanks to technological advances. But an-
other camp, led by Cai Fang of the Chinese
Academy of Social Sciences, has been win-
ning the argument so far. A shrinking la-
bour pool is pushing up wages and, as firms
spend more on technology to replace work-
ers, pushing down returns on capital in-
vestment. The upshot, Mr Cai calculates, is
that China’s potential growth rate has fall-
en to about 6.2%—almost exactly where it
is today. The labour shortage is hitting not
just companies but entire cities. From
Xi’an in the north to Shenzhen in the south,
municipalities have made it easier for uni-
versity graduates to move in, hoping there-
by to attract skilled young workers.
China could, in theory, mitigate the
downside from its ageing by boosting both
labour-force participation and productivi-
ty—that is, getting more people into work
and more out of them. Neither is easy. Re-
tirement ages are very low in China (in
many jobs, 60 for men and 50 for women),
but the government has resisted raising
them for fear of a backlash. And a return to
state-led growth under Xi Jinping appears
to be hurting productivity. As George Mag-
nus, an economist, writes in “Red Flags:
Why Xi’s China is in Jeopardy”, demogra-
phy is not destiny, and China has time to
change course. “The bad news, though, is
that the time that is available is passing by
rapidly,” he says.
One piece of good news is that China is
thinking creatively about how to look after
the swelling ranks of pensioners. Tradi-
tionally, children have been expected to
care for their elderly parents, which helps
explain why public investment in old-age
homes has been minimal. But most fam-
ilies now have just one child, and that child
is working. Suzhou, a wealthy city near
Shanghai, shows how China can take ad-
vantage of its scale. In 2007 Lu Zhong, an
entrepreneur, founded Jujiale as a “virtual
retirement home”, dispatching helpers to
private homes on demand. It now has 1,800
employees serving 130,000 retired people.
Mr Lu says that it needs to grow by about
15% a year to keep up with demand.Yetthatisa silverliningina grey-haired
cloud.OnOctober1stChinacelebratedthe
70thanniversaryofthePeople’sRepublic.
Bythecentenaryin2049,MrXihasvowed,
Chinawillhavedevelopedtothepointthat
itsstrengthisplainfortheworldtosee.But
asRen Zeping,a prominenteconomist,
tartlynotedina recentreport,themedian
ageinChinain 2050 willbenearly50,com-
paredwith 42 inAmericaandjust 38 inIn-
dia.That,hewrote,raiseda question:“Can
werelyonthiskindofdemographicstruc-
turetoachievenationalrejuvenation?” 7TheMiddle-AgedKingdomSource:UNWorldPopulationProspectsMedianageoftotalpopulation,years01020304050601970 80 90 2000 10 20 30 40 50JapanFORECASTEurope USIndiaChinaW
hen noel quinntook over as inter-
im chief executive of hsbc from John
Flint, ousted by the board in August, an-
alysts expected a change in style. Whereas
Mr Flint was seen as a cerebral introvert, Mr
Quinn is forthcoming, verging on blunt.
On that front, at least, hsbc’s first quar-
terly-results announcement on his watch
did not disappoint. Although its Asian
business “held up well in a challenging en-
vironment”, performance in other areas
was “not acceptable”, Mr Quinn said on Oc-
tober 28th. Third-quarter net profits, down
by 24% on the same period last year, to
$3bn, undershot pundits’ forecasts by 14%.
Revenues fell by 3.2%, to $13.4bn, missing
expectations by 3%. Return on tangible
equity (rote), its chief measure of profit-
ability, reached 6.4%, compared with an-
alysts’ forecast of 9.5%. Investors agreed
with Mr Quinn: the bank’s shares dropped
by 4.3% on the news in London. They have
fallen by about 11% in the past six months.
hsbc’s woes can be blamed in part on
broader conditions: low interest rates, aslowing global economy, business uncer-
tainty in Brexit-hit Britain and trade ten-
sions (hsbcis the world’s largest provider
of trade finance). Yet that is hardly likely to
reassure investors. Tom Rayner of Numis
Securities, a broker, points out that al-
though some of these trends may be re-
versed, others, such as Brexit and the trade
wars, may linger. Interest rates may well
fall further. Investors are not yet pricing in
any impact from protests in Hong Kong,
where hsbcis the largest lender. That is too
optimistic, says Fahed Kunwar, at Red-
burn, another broker.
Mr Quinn does not deny the scale of the
challenge. hsbcis ditching its rote target
of 11% for 2020, and there are hints of a rad-
ical overhaul. Mr Quinn spoke of accelerat-
ing plans to “remodel” poorly performing
businesses. In August the bank announced
a plan to complete 4,700 redundancies by
the end of this year. Reports suggest hsbc
could seek to cut an additional 8,000-
10,000 jobs from its headcount of 238,000
(a spokesperson declined to confirm the
number of jobs to go).
Yet after years of cost-cutting, analysts
are divided as to whether much more fat
can be trimmed. Daniel Tabbush of Tab-
bush Report, an Asia-based research firm,
says hsbc“is not particularly bloated”. The
bank may also partially exit some share-
trading activities in Western markets, and
wants to sell its French retail operations.
But a hasty disposal of badly performing
units, which also include its American
wholesale arm, may force it to write down
part of their value.
So hopes must be placed in the second
prong of hsbc’s grand reform—to move
capital away from the dreariest businesses
and towards “higher growth and return op-
portunities”. hsbc’s cost-to-income ratio is
104% in Europe, compared with 43% in
Asia, where it generates nearly 90% of its
profits. It makes only a quarter of its lend-
ing in Britain, yet the country generates
35% of its non-performing loans, says Mr
Tabbush. Its $98bn of risk-weighted assetsA banking giant in Asia and Britain is
still struggling to fire on all cylindersHSBC’s latest planFailure to thrive
Truth hurts
Return on tangible equity
Q3 2019 orlatestavailable,%Sources:Bloomberg;companyreports20151050-5-10Deutsche BankHSBCStandard CharteredBNP ParibasCrédit AgricoleCitigroupICBCDBS BankJPMorgan Chase