China Changed to a Two-Child Policy in 2016

How Will It Affect International Investors in the Following Years?

Pregnant women standing in waterfront
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China’s family planning policy, which became widely known as the one-child policy, was implemented in the 1980s to alleviate social, economic, and environmental problems.

While the program included a number of exceptions, the birth rate fell from 2.8 births per woman in 1979 to 1.6 births per woman by 1998, suggesting that the policy was successful in achieving its goals. The ratio of males to females also reached 1.17:1 compared to global averages of between 1.03:1 to 1.07:1.

The Effects of Controlled Fertility

The falling birth rate could take a big toll on the country’s economy by decreasing the working-age population. The United Nations predicted that between 2010 and 2030, the country’s working-age population could shrink by around 7%, which translates to fewer workers generating tax revenue to cover the rising number of retirees requiring social benefits. These long-term demographic problems mirror those that are already facing countries like Japan.

On October 29, 2015, a communique from the Communist Party revealed plans to abolish the one-child policy in favor of a two-child policy. The policy change has been widely seen as an attempt to remedy these long-term economic problems by generating a so-called demographic dividend.

In other words, the desire is to boost the number of younger workers in order to offset the growing number of retirees, ultimately (and hopefully) avoiding any future demographic problems—but its success remains uncertain.

Will It Matter?

The dramatic decline in the Chinese birth rate following 1979 might seem to suggest that the policy had a big impact, but similar declines occurred at the same time in other Asian countries without the same policy in place.

The birth rate in many developed countries has similarly fallen over time for a variety of reasons, one of which is the availability of birth control. As a result, it’s unclear whether the policy had a meaningful cause-effect relationship or was simply a meaningless correlation.

When certain exemptions were introduced in 2013, just 6.7% of eligible families applied to have a second child. These data points suggest that the policy may not have been responsible, at least solely, for the dramatic impact on the country’s declining birth rate.

Economic Factors and Conditioning

Many couples seem to be choosing to spend their wealth on a better standard of living rather than having children, especially given the rapidly escalating cost of living in urban areas that are becoming densely populated.

There’s also the question of whether or not the country is equipped to handle a higher birth rate in the short-term. Beijing’s maternity wards were overbooked into the first half of 2016 following the relaxation of certain policies in early 2014, according to IHS Global Insight.

If facilities are too full to have children, some families are going to have to wait, further slowing the desired increase in birth rates. An economic decline in the country could also lead many couples to wait to have more children.

The result of the policy might well have been conditioning of Chinese society to be more conscious about choosing to have multiple children. The one-child policy could very well have socially conditioned the younger generations when it was passed, creating an inherent social stigma against having multiple children.

Short-term Pain is Inevitable

The Chinese economy may have to wait two decades or more for the impact of the two-child policy to be felt in any meaningful way. After all, the most significant problems with population control arise when the retirement age population grows faster than the working-age population.

With the new policy in place, the economy will eventually realize the benefits when the children born following 2010 begin to join the workforce to help offset the growing number of individuals retiring.

The benefit of a high birth rate is the creation of a demographic dividend, but these children become dependents before they become workers. While dependents can help stimulate economic spending in some ways, many parents feel compelled to spend money on basic needs rather than luxury goods. 

China's Savings Rate

Also influencing the economy is China's rate of saving, continuously high when compared to the world average over the last 30 years. As families are beginning to see growth, savings might see an increase since there will be more concern about spending on children's needs than saving for retirement.

Conversely, there could be a reversal in savings—according to the CIA WorldFactbook, 22% of the Chinese population is over the age of 55. The rising numbers of elderly Chinese (born before the one-child policy) do not have the social support of the younger generations due to the reduced number of younger workers contributing to the social systems.

Therefore, the elderly may be in need of financial assistance from their families at the same time extra children are being raised. Until a balance is reached, there will be some growing pains for the Chinese and investors alike.

Impact on Investors

The United Nations believes that the two-child policy will add an extra 23.4 million people to the Chinese population by 2050. However, what's uncertain is if that will be enough to change the working-age population to the non-working age population ratio, which has been an economic drag.

International investors may want to adjust their expectations for China's economic growth to account for these potential declines. Since the same problems are already affecting many developed economies, including Japan, investors may get a better glimpse of how these trends will impact their portfolio before they materialize in China.