In November, Chinese leaders proposed an ambitious roadmap for wide-ranging reforms. Among the proposals, one of those most likely to be put quickly into action is a blanket revision to China’s one-child policy that would make most couples eligible to have a second child.
Media Have Overstated the Impact of These Reforms
We think media reporting on the one-child policy has been overstated. It’s true that the policy has had a dramatic impact on Chinese demographics since its inception in the early 1980s. But the government has been easing the policy in various ways for a long time.
In essence, the law stated originally that Chinese couples could have only one child. This was a huge cultural shift for China, where the importance of the extended family is very great, and the rise of a generation where many people have no siblings has created deep social stress. As is the case in much of the world, couples felt it was very important to have a male child, and this led, through selective abortion and even infanticide, to a generation where men modestly outnumber women.
The Government’s Motivation
Many public academics and policymakers in the 1970s and 1980s raised fears of overpopulation and its dire effects on developing nations. But we don’t believe that those fears were behind the Chinese policy. Over the 30+ years that the one-child policy has existed, analysts estimate that it has resulted in 400 million fewer births in China.
This means that during China’s ramp-up as a global economic power, the government was able to concentrate its resources more on the buildup of industry and infrastructure than on meeting the social and economic burden of 400 million more citizens. On the whole, the policy seems to have worked well as part of China’s long-term growth strategy.
Gradually Easing Restrictions
As we noted above, though, the policy was strictly enforced only for a few years at its inception. After that, it was eased for various reasons and in various regions — for example, for ethnic minorities, or for rural Chinese in certain provinces. That easing has slowly extended over the years; it’s still relatively strictly enforced in China’s developed, urban areas. However, a nationwide change was enacted in 2009, which made couples eligible to have a second child if mother and father are both only children (or “singletons,” as they’re called) themselves.
The reform proposed in November would broaden that easing to include couples where just one parent is a singleton, rather than both. As you can see, this is nothing revolutionary — it is a sterling example of the way China conducts policy: incrementally, watching the results carefully at each step. (It’s the same way they’ll conduct policy as they create and expand their local “free-trade” zones.)
Many analysts believe that this is a prelude to the universal permission for two children per couple, probably in the next few years.
Why the Change?
So why ease the policy — why not just continue it indefinitely?
The graph below tells the story. It shows the age breakdown of China’s population: the first in 1995, half a generation after the implementation of the one-child policy, the second in 2011.
A “normal” distribution of ages will be a pyramid, with each age band being smaller from younger to older. China shows the effect of the one-child policy in a big bulge followed by smaller cohorts of young people. As that bulge gets older and moves up the pyramid, and especially as its members leave the workforce, China will face — in spades — the same problem posed for the U.S. by the retirement of the Baby Boomers. The ratio between workers and the retirees they’re supporting will get more and more unfavorable.
As a consequence, analysts expect the Chinese labor market to tighten, with a net labor shortage by 2020. This shortage will likely persist for about a decade, and then ease.
So having achieved its goals, China has been easing off the program, to improve its demographic landscape going forward. And the changes announced in November are just the most recent (and maybe most dramatic) move.
Effects on the Chinese Economy
For investors, the question is what insight into Chinese markets can be gained from these observations.
If the implementation of the one-child policy was rooted in a desire to reduce births so that resources could be funneled into infrastructure and industry, then the easing of the one-child policy is rooted in the opposite goal.
The macro story for China now is its transition from growth led by capital expenditures in heavy industry and export manufacturing to growth led more by the consumer sector.
Therefore easing, and perhaps finally abandoning, the one-child policy will generate more consumers, as well as more consumer spending on expanding households.
According to analysts, between 2014 and 2020, there will be in total an additional 8.3 million births — on top of the 108 million that would have been expected in that period without the change. So that’s a 7.7 percent boom in babies over the next six years. (This is based on the presumption that all couples will be allowed to have two children by 2016.)
Most of these incremental babies will be born to urban, relatively affluent Chinese consumers, since the policy has already been significantly eased in the countryside. With average expenditures per child of about ,000 from birth to 18 years, the cumulative effect will be 5 billion in additional consumer spending. That number is not far off from China’s 2009 stimulus package.
In short, the repeal of the one-child policy is a stimulus package for the Chinese consumer economy. And in that perspective, it’s not a small one.
Short- and Long-Term
Short term, this additional spending is bullish for baby-related consumer goods, as we’ve mentioned in this letter before: formula and dairy, diapers, personal care products, etc. According to analysts, births in 2014 will be up from baseline about 3 percent, and in 2015, almost 5 percent.
Current patterns of Chinese retail growth also suggest that e-commerce companies may be particularly interesting in relation to this uptick: perhaps especially companies such as Dangdang (DANG) with a high exposure to relatively wealthy female consumers.
Longer-term, this is part of the arc of China’s development story towards the consumer. As one analyst notes: We anticipate China’s trend growth to slow down further, but it will be of improved quality and with reduced financial risks.
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