China's population

Two children will be better than one for China’s economy

Keyu Jin says Beijing’s shift to a two-child policy will have far-reaching social effects but could also help put the economy on a more stable long-term growth path by boosting domestic consumption

PUBLISHED : Friday, 08 January, 2016, 11:49am
UPDATED : Friday, 08 January, 2016, 11:49am

The announcement that China is terminating its one-child policy marks the end of a 37-year historical aberration that has accelerated the country’s demographic ageing by decades. The social and economic consequences of the drastic population controls, which reduced the average fertility rate in urban households from about three in 1970 to just over one by 1982, have been dramatic. The question now is whether, and to what extent, the country’s new two-child policy will mitigate those consequences.

READ MORE: China’s new two-child policy legislation formally comes into force

In fact, the impact of the two-child policy is likely to be just as far-reaching – and much more positive. This is especially true in the long term. A key reason is that an increase in the number of children per household will force a reduction in the aggregate savings rate, fulfilling a long-standing macroeconomic goal.

China’s current saving rate is so high it is often blamed for fuelling global imbalances. Moreover, it is a major obstacle in China’s transition from an export-led growth model to one based on domestic consumption and services. The two-child policy may prove indispensable in propelling this transition – a process that will begin sooner than most observers anticipate.

As retirees outnumber working-age people, the pressure on today’s younger generation will intensify

So far, economists have focused largely on the impending shifts in China’s demographic structure. Driven by the one-child policy, the share of China’s population under the age of 20 fell from 51 per cent in 1970 to 27 per cent by 2010, while the share of people aged 60 and up rose from 7 per cent to 14 per cent. As a result, the median age increased from about 20 to 35.

As retirees increasingly outnumber working-age people, the pressure on today’s younger generation will intensify. In the coming years, each member of the post-1980s one-child generation will need to support two older people, on average.

Of course, when the two-child generation becomes middle-aged, its members will each have to support only one elderly person, on average, alleviating the economic pressure associated with such a high old-age dependency ratio. But that will take a few decades. In the meantime, the post-1980s one-child generation will be supporting not only the elderly, but also a higher number of young people.

Although this will be tough on the one-child generation, an unintended side effect will be a surge in consumption, as its members will have little choice but to spend a lot more. A comparison of families that had twins under the one-child policy and those that had just one child offers an indication of the scale of the change (though the inability of twins’ parents to spread out consumption spending over time means that it is not a perfect representation). In terms of saving, urban households with two children saved 12.8 per cent of their incomes, on average, in 2009, compared to 21.3 per cent in families with an only child. The difference is large across all income groups.

The child-fuelled boost in household consumption will affect some sectors more than others. At first, the surge in the number of children will boost the performance of stocks in children’s books, toys, and bicycles. As that generation ages, demand for housing, life insurance and pharmaceuticals will increase.

One of the biggest differences will be expenditure on education. According to the 2009 urban household survey, a one-child household in China spends an average of 10.6 per cent of its total income on education, whereas a household with twins spends 17.3 per cent. As the number of households with two children increases, this change alone could cause the aggregate saving rate in China to drop by as much as 7-10 percentage points, from 30 per cent today to about 22 per cent over the next 10 years.

READ MORE: Traumas of China’s one-child era will live on in the two-child policy

There is a caveat. More children also mean less education investment per child. Indeed, the average twin receives far less support after age 15 than the average only child, creating large differences in education outcomes. Twins are 40 per cent more likely to go to a vocational high school than only children.

Nonetheless, the shift to a two-child policy is badly needed. It could be a boon to China’s efforts to put its economy on a more stable long-term growth path.

Keyu Jin is a professor of economics at the London School of Economics. Copyright: Project Syndicate.