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China’s reversal of one-child policy will have economic implications

editorials Updated: Nov 01, 2015 23:31 IST

A girl walks with her grandmother at a market in Beijing, China, in this November 25, 2013 file photo. China will ease family planning restrictions to allow all couples to have two children after decades of the strict one-child policy, the ruling Communist Party said on October 29, 2015, a move aimed at alleviating demographic strains on the economy.(Reuters Photo)

In the 1970s Deng Xiaoping explained that China’s one-child policy was being introduced to ensure “the fruits of economic growth are not devoured by population growth”.

Last week, Chinese leader Xi Jinping’s rationale for officially abandoning the policy was the reverse: To ensure economic growth is not wrecked by population decrease. But it is probably too late to change China’s demographic future.

China’s population has begun to age — and age rapidly. The working-age population between 15 and 59 has fallen 3.7 million since 2013 and the drop is accelerating. Just as telling, the old-age dependency ratio is rising. The number of elderly relatives supported by a young Chinese has doubled since 1980.

Why does this matter economically? At the heart of Mr Xi’s economic reforms is a shift from investment-based to consumption-driven growth. But the more elders a young Chinese has to support, the less likely she is to splurge on the good things in life.

While Mr Xi wants to move away from being the world’s manufacturing hub, he wants a soft landing. A rapidly shrinking workforce means skyrocketing wages and factories moving out faster than Beijing wants. China’s problem is that its people are already too wealthy for the change in policy to make a difference. As incomes rise, couples invest more in fewer children. Inevitably, fertility rates fall below replacement levels. China is already an upper middle-income country, largely urbanised, and its couples driven to spend heavily on their children’s education, health and other comforts of life. One or two kids is about all they can afford.

It is often forgotten that Beijing relaxed the one-child policy back in 2013. If a couple included one member who was a single child, they could apply for a second child. Barely one million couples bothered — 13% of those eligible.

Japan is the demographic parallel for China. The question is whether China will face Japan’s economic fate. Old-age economies can still grow, but must pour money in education, technology and health to extract more wealth creation from fewer people. Japan has been trying that, but with minimal success.

In India’s case, it has a large and youthful population, but has underinvested in it and strangled its businesses for decades. It remains unclear if it will be able to cash in on its demographic dividend or find itself with a population liability of millions of underemployed.

Demographer Yi Fuxian warned recently: “China is turning grey on an unprecedented scale in human history, and the government, even the whole of Chinese society, isn’t prepared for it.” The title of his once-banned book says it all: A Big Country with an Empty Nest.