China’s One-Child Policy Revision a Positive Step, But Unlikely to Reverse Demographic Challenges


Ben Kirby, CFA

A positive step, but correlation between rising incomes and falling birth rates still holds

China has announced a modification to its long standing one-child policy, now allowing eligible couples to have two children. The one-child policy, introduced in 1978, has been enforced through fines, forced abortions, and mandatory sterilization, and has faced increasing criticism both inside and outside of the country. While there have always been exceptions to the rule – ethnic minorities, rural families, and couples who themselves were only children, for example – this is the broadest loosening of restrictions in nearly 40 years.

The one-child policy may have helped China to maximize its demographic dividend and to spur economic development over the last few decades, but it also created social imbalances with long-term consequences. “The ratio of children in the population has been dwindling, creating a potential future shortage of workers,” Mu Guangzong, a demographics expert at Peking University, was quoted on China’s State Council website as saying. In 2015, China had 130 pensioners (age 65+) for every 1,000 working-age persons (age 15-64). By 2050, the United Nations estimates there will be 467 pensioners for every 1,000 working-age persons. While this change will occur gradually over a 35-year period, the impact on the economy can be profound. We expect demographic dynamics to drive lower potential economic growth, lower inflationary pressures, and lower equilibrium interest rates. China’s reported third-quarter gross domestic product grew 6.9%, and benchmark one-year interest rates stood at 4.35%. We expect both of these figures to trend lower over time.


Chinese Demographics

Source: United Nations, Department of Economic and Social Affairs, Population Division



Old Age Dependency Ratio

Source: United Nations, Department of Economic and Social Affairs, Population Division


Given China’s dependency ratio, investment opportunities may be greater at the graying end of the country’s demographic spectrum, as noted in an Emerging Views article on emerging market private hospitals. A few infant-oriented consumer sectors may experience better demand, but we don’t expect the relaxation of the one-child policy in China to spur a baby boom in the coming years, given the correlation between rising incomes and falling birth rates. We do, however, applaud the country for this reform and hope to see more social and economic reforms in coming years.

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