After almost four decades, China has scrapped its one-child policy. The government said the decision was made to reverse the trend of an ageing population and sustainably boost consumption levels in the long term.
However, fund managers and economists are not optimistic: most believe the step is too little, too late to have a beneficial effect on the economy. On the plus side, there is growing belief that this could be the first in a series of steps China’s government is likely to take to reverse the falling birth rate.
Change will be glacial
Philippe Waechter & Raphael Gallardo, Natixis Asset Management
This is the first recognition that there is a problem linked to the structure of the Chinese population: people are getting older and something has to be done. However, we’re not sure the new law will dramatically change the picture.
There will probably be a mini baby boom in China, specifically in regions where the one-child policy was applied strictly.
We don’t expect this change to have a large impact on equity markets. Stocks fuelled by black money, such as luxury goods and high-end technology products, will probably be the main casualties of the decision.
Consumer-related stocks linked to childcare, goods and services should benefit, but we don’t expect the decision to have a major impact on birth rates in the short term. For one, the drop in the fertility rate has some endogenous and sociological roots (the rise of the middle-class, urbanisation, the development of social welfare). Second, the 36-year-old policy has been de facto abolished in most areas already.
In the longer term, it is clear that the programmed decline in the labour force will not be reversed by this decision, as it will take two decades to replenish the labour force with workers born after the end of the one-child policy.
Good for growth
Helen Zhu, Blackrock
After 36 years of the one-child policy, all Chinese families will now be allowed to have two children. At the other end of the age spectrum, the government plans to further reform the pension system and expand insurance coverage at a national level.
However, shifting demographics is a lengthy process, and the headwind of low labour-force growth will not be fully relieved in the next few decades.
Both of these moves have clear longer-term benefits with no real downside risk to growth. It is our view that addressing the problems sooner rather than later may have near-term cyclical implications. The relaxation of the one-child policy and the successful enhancement of later-life safety nets could help boost near- to medium-term demand growth through greater levels of consumption among children and older people.
A baby step in right direction
Jian Shi Cortesi, GAM
The scrapping of the one-child policy is a sensible move, given that China’s working population started to shrink last year and it has a rapidly ageing population. What’s more, the reforms answer people’s need for greater freedom in general.
Judging by public reaction, we expect a short-term surge of new babies in the next few years, but the birth rate (currently 1.7 children per woman) over the long term is likely to converge with more developed Asian countries (in South Korea and Japan the average is 1.4).
It is a good policy move in terms of boosting consumption, but the impact may be more modest than anticipated. Baby food and baby products are the obvious beneficiaries, but China already consumes about $19 billion-worth of baby food annually.
In the medium term, education services will benefit. Consumption in many other areas will benefit, too – such as autos (larger cars), housing (more living space) and insurance – but to a lesser extent.
In general, the move will have a positive effect on the economy and help the government’s effort to rebalance the economy towards a service- and consumption-driven economy.
Only the beginning
Qinwei Wang, Pioneer Investments
This move marks a significant change in China’s population policy, from controlling to cautiously encouraging. It suggests China’s leaders are more aware of the potential threats of an ageing population on the country’s labour supply, economic structure and social issues.
It also implies that, if the birth rate remains low, the policy may be further eased.
Overall, this is a move in the right direction that will help relieve the pressure of a quickly ageing population. In the coming years, certain consumer sectors should benefit from the additional children born under the new policy.
That said, the meaningful effects on the broader economy, in terms of growth and structure, will take much longer to become apparent. Perhaps more will need to be done in the future.
This article originally appeared on issue 20 of Citywire Asia