In The Headlines
A Gray Tsunami May Swamp China’s Plans for Long Term Growth
The world’s most populous country is turning gray at an accelerating pace. That aging has big implications for China’s economic growth, which could be undermined as the labor force declines sharply from 2021 to 2030. It also strains the nation’s expenditures for public services, insurance, and health care, and puts a dent in domestic consumption.
China’s latest population development plan, released by the State Council late Wednesday, projects that about 25% of China’s population will be 60 or older by 2030; that is up from 13.3% reported in the country’s latest census in 2010. The number of children 14 or younger will decline to 17% over the same period, the plan estimates. About 36% of the population in 2030 will be 45 to 59, it said. That age group grew from about 20% of the total population in the 2010 census. These demographics point to a shrinking labor force which threatens to put China’s competitive edge in global manufacturing at risk—and equally as damaging, it threatens to be a drag on consumption, now a major pillar of the economy as it transitions away from the old smokestack drivers of growth.
The consequences for China’s finances are profound. With more people now exiting the workforce than entering it, many Chinese economists say that demographics are already becoming a drag on growth. More immediately alarming are the fiscal costs of having far more elderly people and far fewer young people, starting with the expense of creating the country’s first modern national pension system.
Unlike residents of China’s prosperous eastern cities, hundreds of millions of peasants and migrant laborers have scant personal savings and rudimentary retirement coverage, if any. “One goal is to extend pension coverage to everyone,” says an economist with the Chinese Academy of Social Sciences, in Beijing. “But that will be very expensive, because most people haven’t paid anything into the system at all. Basically, what this means is a wealth transfer.” Providing health care to these same disadvantaged classes will also be vastly expensive.
In 2013 China loosened the one-child policy to allow some families—those in which one parent is an only child—to have two children. That did not result in the initial boost that demographers had projected. Despite warnings from family planning officials that lifting the controls could trigger a baby boom, only a small fraction of those families eligible have applied to have a second child. In Beijing, for instance, less than 7% of eligible couples have applied.
Births in 2016 reached 17.86 million, the most since 2000, rising by 1.91 million from 2015, the National Health and Family Planning Commission said this month. That still falls short of the official projection. Last June, the ministry estimated there would be an increase of 4 million new births every year until 2020. China will continue to implement the two-child policy to promote a balanced population, the plan said.
Even so, the latest plan said birth rates could remain low. The total population is now expected to peak around 2030 and begin to decline after that. The plan set a population target of 1.42 billion by 2020, and 1.45 billion by 2030. It also supported more urbanization, with more than 13 million people projected to move to cities from rural areas every year between 2016 and 2020.
Citations
1. http://bloom.bg/2jsvvns – Bloomberg
2. http://theatln.tc/1WroD89 – The Atlantic
Sprint Leverages its Small Cell Technology to Take on Verizon
T-Mobile and Sprint have been attracting more new customers since they introduced cheaper unlimited data plans last summer. Now Sprint is going even cheaper. The move was made to combat Verizon, which this month introduced a new 5 GB plan at $55 per month, just below Sprint’s $60 starting price for its unlimited plan. Verizon accompanied the plan with TV commercials criticizing the more expensive unlimited plans as “unnecessary.” So Sprint dropped the price of its unlimited plan to $50—at least for a limited time—as a promotional offer.
“Is Verizon living in an alternative reality,” Roger Solé, Sprint’s top marketing officer, asked in a blog post announcing the price cut. “I’m scratching my head after seeing Verizon’s new ads claiming consumers don’t need–or want–unlimited wireless plans? And they say their new 5GB plan is the plan we’ve all ‘been waiting for.’ All of us at Sprint couldn’t disagree more.”
Customers who sign up for the new Sprint $50 price get it until the end of March 2018, when the monthly charge will rise to the old $60 level. And the “unlimited” data plan includes the same small print limits as the plan introduced last summer. Sprint will automatically degrade the quality of video and music streaming, and a customer’s download speed can be dramatically slowed if they use more than 23 GB of data in a single month. The move follows T-Mobile’s decision earlier this month effectively to cut the price of its unlimited offering by eliminating surcharges and taxes as additional fees on customer bills.
Technology and capacity are the keys to Sprint’s unlimited data strategy. Sprint can leverage its spectrum and the use of small cells to increase the density of its network and add capacity more cheaply than its competitors, according to CEO Marcelo Claure. Sprint’s network strategy has been the subject of much speculation since Recode reported that the carrier was moving forward with plans of a “radical overhaul of its cellular network.” The company planned to save as much as $1 billion, according to the report, by leveraging small cells and relocating its towers from space leased by Crown Castle and American Tower to government-owned land where rent is cheaper.
Meanwhile, the nation’s fourth-largest carrier has needed to invest less in its network as it moves to small cells. Sprint raised eyebrows last year when it lowered its capacity expansion guidance for the rest of the year to roughly $3 billion, far below analysts’ estimates in the range of $4.5 billion. Sprint’s airwaves will be crucial as the small-cell deployment ramps up, Claure said. The carrier continues to tout the benefits of its 2.5 GHz spectrum, which the company says is particularly well suited for increasing capacity in the densely populated areas, where small cells are most effective.
For most of last year, Verizon was not able to offer a compelling alternative to the smaller carriers’ unlimited plans. While reporting fourth quarter results, Verizon conceded that it would see no growth in wireless service revenue this year due to the increasingly fierce price wars roiling the market. Feeling heat from the competitors that had eliminated data overage charges, Verizon last year introduced its own set of plans without the hated fees and saw more customers than expected switch to those plans. That is a win for consumers, though Verizon shareholders were less than pleased to hear the news. The stock lost 6% following the announcement.
Sprint and T-Mobile still have far fewer customers than Verizon and somewhat less broad wireless coverage, though they are closing that gap. But they have considerably more spare capacity on the airwaves of their networks than Verizon, which analysts consider spectrum-constrained. That makes it tough for Verizon to offer an unlimited data plan, which would encourage greater usage and lead to further congestion of its airwaves. Even AT&T has offered a more expensive unlimited plan to its DirecTV customers and now has 8 million signed up. Recently, new CFO Matt Ellis repeated the company line that Verizon sees no need to offer an unlimited plan. “That’s not something we feel we need to do,” Ellis said.
Citations
1. http://for.tn/2kFkmkP – Fortune
2. http://bit.ly/2cuoxuB – FierceWireless.com
The Good News Is . . .
• Seasonally adjusted purchase applications for home mortgages rose 6.0% in the week of January 20 to the highest level since June. Unadjusted, the purchase index rose 2% in the week and was 0.1% higher than a year ago. Applications for refinancing rose 0.2% from the prior week, with the refinance share of mortgage activity falling to 50%, down 3% from the prior week and the lowest level since July 2015. Purchase application volumes, in contrast to refinancing, are showing surprising resiliency in the face of rising mortgage interest rates.
• Corning Inc., a global specialty glass and ceramics technology firm serving the electronics, telecommunications, transportation, and life sciences industries, reported earnings of $0.50 per share, an increase of 47.1% over year-earlier earnings of $0.34 per share. The firm’s earnings topped the consensus estimate of analysts by $0.06. The company reported revenues of $2.6 billion, an increase of 6.2%. Management attributed the results to expanded volume for its Gorilla Glass product line and strong growth in its optical communications business.
• British American Tobacco said that its $49 billion offer to buy the stake in Reynolds American, which it did not already own, was accepted. The purchase would create the world’s largest publicly traded tobacco business, based on net sales, and it would combine companies with brands that include Camel, Lucky Strike, Newport, and Pall Mall. It comes as the industry faces a shift toward so-called next-generation products such as e-cigarettes and vaping products. Under its cash-and-share offer, British American Tobacco would pay $59.64 a share for Reynolds American. The new company would have a strong share of the market in the United States, as well as a major presence in Africa, Asia, the Middle East, and South America.
Citations
1. http://bloom.bg/2eVhfSb – Bloomberg Economic Calendar
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/2kFsPVh – Corning Inc.
4. http://nyti.ms/2kevYds – NY Times Dealbook
Planning Tips
Guide to Understanding Reverse Mortgages
If you own your own home and are at least 62 years of age, a reverse mortgage provides an opportunity to convert your home equity into cash. In the most basic terms, the reverse mortgage allows you to take out a loan against the equity in your home, but you do not have to repay the loan during your lifetime as long as you are living in the home and have not sold it. If you want to increase the amount of money available to fund your retirement, but do not like the idea of making payments on a loan, a reverse mortgage may be an option to consider. Below is a brief guide to how reverse mortgages work. Be sure to consult with your financial advisor to determine if a reverse mortgage is appropriate for your economic situation and financial goals.
How reverse mortgages work – With a reverse mortgage, a lender makes payments to you based on a percentage of the value in your home. When you no longer occupy the property, the lender sells it to recover the money that was paid out to you. While there are several types of reverse mortgages, including those offered by private lenders, they generally share the following features:
• Older homeowners are offered larger loan amounts than younger homeowners. More expensive homes qualify for larger loans.
• A reverse mortgage must be the primary debt against the house. Other lenders must be repaid or agree to subordinate their loans to the primary mortgage holder.
• Financing fees can be included in the cost of the loan.
• The lender can request repayment in the event you fail to maintain the property, fail to keep the property insured, fail to pay your property taxes, declare bankruptcy, abandon the property, or commit fraud. The lender may also request repayment if the home is condemned or if you add a new owner to the property’s title, sublet all or part of the property, change the property’s zoning classification, or take out additional loans against the property.
HECM loans – The most common reverse mortgage is a federally-insured home equity conversion mortgage (HECM). These mortgages are provided by the U.S. Department of Housing and Urban Development (HUD). HECMs are the only reverse mortgages issued by the federal government, which limits the costs to borrowers and guarantees that lenders will meet the obligations. The primary drawback to HECMs is that the maximum loan amount is limited. The interest rate on HECM reverse mortgages is tied to the one-year U.S. Treasury security rate. Borrowers have the option to select an interest rate that can change every year or one that can change every month. A yearly adjustable rate changes by the same rate as any increase or decrease in the one-year U.S. Treasury security rate. This annual adjustable rate is capped at 2% per year or 5% over the life of the loan. A monthly adjustable rate mortgage (ARM) begins with a lower interest rate than the ARM and adjusts each month. It can move up or down 10% over the life of the loan.
Non-HECM loans – Non-HECM reverse mortgages are available from a variety of lending institutions. The primary advantage of these reverse mortgages is that they offer loans in amounts that are higher than the HEMC limit. One of the drawbacks of non-HECM loans is that they are not federally insured and can be significantly more expensive than HECM loans.
Total annual loan cost – Although the interest rate on an HECM mortgage is set by the government, and the origination cost of an HECM loan is limited to 2% of the value of your home, the total cost of the loan can still vary by lender. Furthermore, in looking for a lender, borrowers must consider third-party closing costs, mortgage insurance, and the servicing fee. To assist borrowers in comparing mortgage costs, the federal ‘truth-in-lending law’ requires mortgage providers to present borrowers with a cost disclosure in the form of the total annual loan cost. Be sure to use this number when comparing loans from different vendors; just keep in mind that the actual costs of a reverse mortgage will depend largely on the income options selected.
Income options – HECM reverse mortgages provide the widest variety of income generating options, including lump-sum payouts, credit lines, monthly cash advances, or any combination of these. The credit line is perhaps the most interesting feature of an HECM loan because the amount of money available to the borrower increases over time by the amount of interest. Non-HECM loans offer fewer income options.
Citations
1. http://bit.ly/1kdZVYk – Bankrate.com
2. http://bit.ly/2jhd4DH – The Motley Fool
3. http://bit.ly/2ade0Tz – Investopedia
4. http://bit.ly/1KdhPor – US News & World Report
5. http://bit.ly/2jITyvW – AARP
