As China's population ages, finding ways to meet the needs of the increasing numbers of the elderly is becoming its greatest challenge. The usual measures would be to use fiscal and financial instruments. But in a country where the state financial system cannot adequately meet demands, more innovative financial services and products will be needed as a supplement.
A well-established financial system for the elderly should meet their demands for security, consumption and investment.
First, in terms of security, there is an urgent need to improve the various types of contractual savings institutions, including insurance and fund providers. Furthermore, new financial products need to be developed, such as reverse mortgages, where senior citizens can get loans from banks or other financial institutions by using their property as collateral.
Admittedly, considering the defects in the Chinese housing system, the real estate bubbles, as well as cultural factors such as the fact that houses are traditionally handed down to children, there are many practical difficulties in launching reverse mortgages in China. Still, the ageing population brings new opportunities for financial institutions, and governments and regulators should guide institutions and agencies to provide a wide range of banking and non-banking products.
Second, the "silver" economy will have a profound influence on worldwide consumption patterns and product structures. Given China's gradual shift to being more reliant on domestic demand for growth, consumption by senior citizens will become a focus for the real economy.
Consumer finance has always been a weakness of the Chinese financial system. For example, one kind of product, operated mainly by insurance companies that target older people, has proved controversial: it offers a "rebate" transferred into a person's pension fund when they buy it. However, the scheme can be confusing as not everyone realises they will receive the "refund" only after they retire. But as long as such products are reliable and regulated, they should be seen an innovative.
Third, pension investments must be a focus for financial innovation. During different phases of their life, investors' appetite for risk and philosophies change, creating ongoing demand for new products. Both long-term institutional investors - who make investments with pensions and annuities - and elderly individual investors need stable returns. China needs to develop fixed-income products, such as bonds, and make them an important component of the financial markets.
Senior citizens also have huge wealth management needs. Services provided by Chinese financial institutions rarely emphasise customer relations and there is a dire shortage of specialised products. Because senior citizens have a small sphere of financial activity, they require increased convenience to encourage them to choose financial products; they have higher requirements for security, liquidity and easy access to cash; they are very sensitive to service prices; and, they require more psychological and emotional care than younger investors.
Thus, the financial sector must tailor-make "silver" investment products. For example, employee stock ownership plans currently being promoted by the regulators will enable retired employees to gain stable returns if the listed company performs well, thus better serving their investment needs.
Policy-based financial institutions and commercial institutions both need to provide financial support for the elderly. Policy-based finance should dominate when it comes to providing security, while commercial finance can act as a supplementary service, by being responsible for consumption and investment.
Both types of institutions will need to work together to tackle financial issues, risk management and other pressures brought about by an ageing society, in order to create a silver financial system that matches the caring culture for the elderly that already exists in China.
Yang Tao is chief economist at the publication China's Economy & Policy, and director general of the research base for industrial finance at the Chinese Academy of Social Sciences