China's leaders announced Thursday they would allow married couples to have two children, rolling back the decades-old one-child policy. In a country where nearly ever aspect of life was once controlled by the Communist Party, the change reduces the Party's control and intrusion into an important and intimate household decision. The effect on the economy in the short-term will be muted, but the change has the potential to accelerate rebalancing to consumption in the near-term and mitigate demographic problems in the long-term.
Leaders are fixing a bad population policy put in place to fix a bad population policy.
When Mao's Communists took over in 1949, he encouraged families to have as many children as possible in order to boost the ranks of farmers, factory workers, and soldiers. As a result, China added 260 million to its population by 1970. To contend with fears of overpopulation, the Party instituted the one-child policy in the 1970s.
The one-child policy has left China with an aging population to support and a workforce already shrinking from its peak in 2010. As you can see from the chart below, China's aging population is on track to become a significant burden over the next few decades. Before this week's policy change the population of 60-year-olds and over was expected to rise from 36 million to 245 million by 2020; from 3% of the population to roughly one-fifth. Not only will the retired population eventually be a significant burden, but older workers require more money and benefits and will add pressure to China's low-cost manufacturers. The policy change should mitigate some of those demographic headwinds.
The change will be muted in the short-term.
There are a couple of reasons why a GDP boost in the short-term should not be expected from this change. First, it will take time for the change to kick in, and obviously even longer for the workforce increases. But, there may be some sectors that benefit rather soon. Households with more than one child are more likely to buy a car. House purchasers may plan on upsizing when they buy a home. Healthcare and some consumer goods will benefit early. But, most of the boost to consumption will come years from now, and the boost to the workforce will take a couple of decades.
Second, many have argued that urban Chinese families are less likely to want or have two children because of the huge costs involved with raising children. China began to relax the one-child rules in 2013, and according to the NYT, as of May this year a disappointing 12% of eligible couples applied to have a second child. It is uncertain how effective the policy change will be on boosting the birth rate. If the policy shift does little to meaningfully increase the birth rate, then both long-term and short-term effects will be limited.
The change will help expedite consumption rebalancing.
The one-child policy change could be coming at a good time for rebalancing to consumption if the change can increase the birth rate. Over the near-term, new parents will need to increase spending out of necessity just as millions of newly retired diligent savers begin to finally unleash hoarded cash into services and healthcare spending.
As China's population ages, millions of prospective pensioners will be getting ready to finally spend decades of hoarded savings. According to Bloomberg, China's most recent bank deposits amounted to roughly $21 trillion, about 200% of GDP. Millions of diligent savers are about to accelerate spending and divert savings to travel, healthcare, and a number of other services. Additional consumption from new parents and pensioners should help boost consumption spending over the next decade as overall growth slows.
The change might mitigate future problems caused by the male/female population disparity.
Allowing for two children could change the male/female population disparity over the next few decades. Removal of the one-child policy will potentially limit the various measures taken by families with cultural preferences for sons over daughters. According to the UN, China has 106.3 males for every 100 females. As a result, there are nearly 52 million more males than females in China, a larger number of people than the population of Spain and Norway combined. That leaves a massive number of potential "broken branches", men with no prospects of having a partner or family, leaving the door open to social issues and diminished quality of life. The NIH in the US has argued that high ratios of males vs. females in countries are a cause of increased aggression and violence of all types. In China, large male/female disparities have not ended well in the past. In 1850, "broken branch" militias in China lead to 18 years of violent uprisings, devastating the Qing dynasty.