How Birth Rates Will Impact China's Economy

Two child policy will not avert an eventual plunge in births in China say analysts, but changes to fertility will influence China’s economy in the decade to come

Daniel Rohr, CFA 28 March, 2017 | 4:39PM
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The influence of demography is often imperceptible quarter to quarter or year to year. But over the long term, it can prove decisive. For much of China’s past 30 years, demography aided extraordinary growth and supported an increasingly investment-heavy economic model. In the next 10 years, we expect demographic change will drag on growth rather than drive it and radically reshape China’s economy. The seemingly limitless supply of “surplus” rural labour, which fuelled rapid urbanisation and productivity gains, will begin to dry up.

The working-age population will contract just as the senior population surges. China’s unusually high support ratio – the number of working-age adults for each child and senior – will collapse, draining the huge pool of savings that funds outsize investment outlays but stabilizing consumption growth as the overall economy slows.

Two Child Policy Will Not Avert a Plunge in Births

If demography is destiny, the future begins with fertility. Many of the demographic changes China will experience over the next 10 years – slowing population growth, a shrinking labour force, and a rising support ratio – are consequences of a premature fertility crash caused by harsh family planning laws.

The Chinese government has a long history of meddling in reproductive decisions. Initial efforts to manage population growth began in the early 1950s, shortly after China’s population eclipsed the 500 million mark, but had little effect. A renewed push to curb births came in 1970 with the introduction of policies that prescribed late marriage, long birth intervals, and small families. From 1970 to 1980, China’s total fertility rate, the number of births a woman might expect to have in her lifetime, plunged from 5.7 to 2.6, an unprecedented drop for a what was still a poor and largely agrarian country.

The one-child policy, implemented in 1980, had comparatively less impact on fertility, which fluctuated between 2.5 and 2.6 births per woman in the following decade. Then, from 1990 to 2000, despite no major further tightening of family planning laws, fertility fell again, slipping to 1.45 in 2000. Fertility fluctuated between 1.5 and 1.6 for most of the 2000s, well below the replacement level of 2.1 births.

family planning laws triggered initial plunge in fertility

Persistently low fertility prompted concerns that China would grow old before it grew rich. In the past few years, the government began to loosen restrictions. Beginning in 2016, the two-child policy went into effect, contributing to an 8% increase in births from 16.6 million to 17.9 million and boosting fertility to 1.7 children. Relaxed family planning laws have prompted some to speculate that China’s fertility rate will continue to rise.

We’re more circumspect. Surveys of Chinese couples’ childbearing intentions suggest economic considerations, not legal restrictions, largely explain China’s low fertility rate today. China would not be unusual in this regard. Rising incomes are associated with falling fertility globally. This is a consequence of a variety of factors. For example, female workforce participation and college education facilitate income growth but also tend to depress fertility by delaying marriage and births. Urbanization and industrialization are also linked with income growth and falling birth rates. For agricultural households, larger families can be advantageous, since children can be put to work on the family’s plot.

For urban households where education is a prerequisite to success, larger families can be a disadvantage as they have less to invest in each child. For China, decades of high-income growth and urbanization have changed the economic logic of family size.

While Chinese fertility at 1.7 is somewhat low for a middle-income country – 2.2 is the norm, it’s typical of neighbouring countries’ historical experience. Japan, Korea, Taiwan, and Thailand, none of which enforced compulsory birth control, had similarly low fertility rates at comparable points in their economic development.

Had the government liberalised family planning laws in the 1980s or 1990s, it might have been reasonable to expect a sustained fertility increase. That seems unlikely today. Although we expect 2016’s fertility gains will be largely maintained in 2017 as pent-up demand for a second child is released, those gains are likely to prove temporary.

falling female 20-something population portends a large decline in births

While we don’t forecast a significant drop in China’s fertility rate, a major decline in births is nonetheless likely. That’s because the population of childbearing-age women is set to fall over the next 10 years, with losses concentrated among 20-something women. By 2026, China’s population of 20- to 29-year-old women will fall by more than one third. That’s significant because the birth rate among 20- to 29-year-olds is roughly 5 times that of 30- to 39-year-olds and 50 times that of 40- to 49-year-olds.

Applying our forecast for age-specific fertility to the projected population of childbearing-age women, we estimate 20 million fewer babies will be born over the next 10 years than in the past 10 years, 145 million versus 165 million, a decline of 12%. We forecast births will have fallen to 12.4 million by 2026, down 30% from the 17.9 million births in 2016.

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Daniel Rohr, CFA  is a senior equity analyst at Morningstar.

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