China Axes One Child Policy 36 Years Too Late

Broken ice or glass with a flag pattern, China
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China has scrapped its controversial one child policy in a bid to reverse its aging population and dwindling workforce. In its place, the Chinese government will allow families to raise up to two children. Yet whatever China hopes to get out of this, it’s probably already too late.

Sure, humanitarians will see it as a case of sanity prevailing over pragmatism. But this move is an admission that government officials are panicking. For China, there’s a pressing need to maintain high economic growth rates. Yet economies realities, as they have a habit of doing, bite hard. In promoting a two child policy, China hopes to spur long term economic growth.

This growth fetish has taken on a life of its own. Chinese policymakers adhere to it with cult like verve. A belief that growth must reach a certain level… and stay there at all costs.

Not long ago, China’s GDP growth ceiling was set at 7%. Once it was obvious that maintaining this was optimistic, the tune changed. We’re seeing more evidence of its slowdown every week. Weak economic data, market routs, the whole deal… From manufacturing, to trade and domestic consumption, it’s all down. As a result, the government is shifting its position. It’s now targeting annual growth of 6.5% to 2020.

For the Chinese government, this figure is important from the perspective of jobs. Officials get nervous about any inkling of large scale job cuts. Should growth continue falling, anxiety will only rise.

Yet these concerns are valid, considering the nation’s sketchy history with social upheaval. Keeping everyone busy is part of the government’s way of maintaining social order. That may sound like an exaggeration, but the reality isn’t far from the truth.

One child policy adds to China’s economic woes

Gauging the potential success of the new two child policy isn’t difficult. Not if we go on recent evidence.

In 2013, the government allowed a select number of couples to have two children. There was only one criterion: they had to be an only child to qualify. Yet the impact of this policy proved marginal at best. A mere 1.6 million couples took up the offer in the two years to July 2015. That’s out of a potential 11 million eligible couples…

As a sample, it speaks volumes. Only 15% of those eligible chose to have a second child. What does that tell us if we apply it to the whole nation? For one, population gains are likely to fall well short of expectation. Certainly well below what’s required to stem the tide of an aging workforce.

More than anything, this highlights the shortsightendess of the original one child policy. The Chinese government would argue that it brought hundreds of millions out of poverty. And there’s no denying that it had positive effects. But they didn’t plan for the unintended consequences. As China’s economy grew, it set itself up for a fall.

How? Well, with rising prosperity come rising costs. The low cost manufacturing boom that underpinned Chinese growth is a shadow of its former self. Wages are heading up, making Chinese manufacturing more expensive. Average wages across the sector were 15,757 yuan back in 2006. Today, average wages amount to 51,369 yuan. That means wages have almost tripled in the space of less than a decade.

Because of this, China’s losing out to up and coming emerging markets. Those that can compete on low wages. Particularly economies in South and South East Asia. Above all, low costs are what attract international conglomerates to markets. The worry for China is that it’s manufacturing base will hollow out amid this competition. And in its wake will be tens of millions of unemployed Chinese citizens.

Not only are costs rising, but China’s workforce is aging. Unfortunately, below this greying labour force there’s nothing coming up to replace it. At least nothing that will make up the shortfall once these older workers start retiring.

It sounds crazy talking about job shortages in a nation with 1.3 billion people. But everything is relative. A nation with 500 million workers is no different to one with two million. Why? Because economies revolve around stability of employment. In China, everything just works on a much bigger scale. But from a relative point of view, it’s not overpopulated. If anything, it’s underpopulated. And it’s putting its entire economic future at risk.

Two child policy is just more of the same

The ‘two child’ policy is an attempt to alleviate this problem. Unfortunately, even a two child policy is insufficient in fixing China’s problems. Why? Because China still has a dangerously low fertility rate. At just 1.5, China’s fertility rate sits well below the 2.1 replacement level. Unless fertility recovers past this point, China’s population will continue falling. That would mean even fewer workers in the future.

It also means the number of dependents is on the rise. There are 137 million people aged 65 years or over in China. By 2050, it’s expected that 30% of China’s population will be over 65. Who’s going to look after these people? Not the ever shrinking workforce…

But going back to fertility rates for a moment. These are notoriously difficult to overturn. Once the rot sets in there’s no coming back. No single nation of earth has recovered to 2.1 once its fertility rate fell below this level. China’s two child policy certainly won’t reverse that.

Even if they scrapped population control altogether, it still probably wouldn’t be enough. Once people stop having babies, it’s hard convincing them to start again. We’ve seen this take place in every corner of the globe. The cost of raising children is merely one reason for this. But it’s an important one nonetheless.

Demographics researcher Zuo Xuejin, of Shanghai Academy of Social Sciences, notes:

People are making their decision to have one child not because of family planning policy but because the costs involved are now higher and there is a huge amount of focus on education, requiring special attention’.

There is no miracle cure for China’s population time bomb. Those that had the option to bear more children…haven’t. Not to the extent you might expect. The two child policy will fail to ignite the reversal in lifting fertility rates. The seeds sown with the one child policy won’t be changed overnight, if ever. Which means that it’ll become harder to maintain high economic growth rates in the future. And with fewer children, there’ll be fewer taxpayers too.

There’s another thing to remember about all this too. We have to keep in mind the population lag effect. Any children that are born today won’t join the workforce for another 20–30 years. All this means is that China’s already wasted its demographic dividend. The same one that made it the biggest economic success story over the past 30 years. It doesn’t have a bulge of people of working age anymore, so crucial to fast economic growth.

China is now losing this demographic advantage it once had. The two child policy is recognition that time is running out. Unfortunately, the opportunity for change is long gone. Growth rates of 6.5% are feasible in the short term. But the two child policy won’t fix its population time bomb. At best, it might ease some of the crushing effects of population decline China will have to deal with. But the terminal decline has set in. And it means that China’s growth, like its population, has peaked.

Markets must realise that, for China, things are as good as they’re ever going to get.

Mat Spasic

Contributor, The Daily Reckoning

PS: China’s slowdown affects Australia’s own economic prospects too. The worse things get, the likelier a recession becomes.

The Daily Reckoning’s Greg Canavan believes a recession could hit as early as this year. In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position.

From falling GDP growth, to declining terms of trade, all signs point to a crash. Trade imbalances have been growing for the better part of a year. Government revenues are down, and household debt is up. It adds up to a recession that’s coming sooner than you think.

But there is a silver lining in all this. If you act now, you can protect yourself from the fallout of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

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