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China’s Three Child Policy: What It Means For The Economy

Posted: 9th June 2021 09:24

Couples in China will now be allowed to have up to three children, as policymakers seek to address the country’s long-term demographic imbalances.

The announcement came on May 31, 2021, following a Chinese Communist Party Politburo meeting chaired by President Xi Jinping.

Additionally, the Party announced supportive measures to address educational and housing costs, aiming to ease the financial burden of raising children.

The latest relaxation of family planning comes just weeks after China announced the results of its latest census, which projects a rapidly aging society and shrinking working age population.

Beyond affecting the personal lives of millions of families in China, the new three child policy will have long-term implications for the country’s demographics and macro-economic profile.

What Is China’s Updated Family Planning Regulations?

With the new reform, all couples in China are allowed to have up to three children. Pre-existing exceptions to family planning remain in place, such as the absence of birth limits for some ethnic minority groups.

As before, couples who have more children than permitted face heavy fines, as well as unofficial penalties like job loss, particularly for those employed in the public sector.

To ease the costs of raising children, policymakers also said they would address housing and education costs, as well as strengthen maternity leave policies. The government did not make concrete commitments on these issues, but said that it would “protect the legitimate rights and interests of women in employment.”

Chinese couples have been allowed to have up to two children since 2016, while parents from single-child families have been able to have two children since 2013. These policy shifts brought an end to the controversial “one-child policy”, which limited most couples to a single child since about 1980.

The Chinese government originally instituted the one-child policy under Deng Xiaoping’s leadership, when the population was impoverished and growing rapidly while society underwent a number of political and economic transformations.

Why Did The Government Change The Rules?

China’s latest census confirmed long-standing demographic imbalances that could pose major threats to the sustainability of the country’s economy, prompting Party leaders to take action.

According to the census, there were 12 million newborns in 2020, which was the lowest number of births since a famine in the 1960s. The fertility rate was 1.3 children per woman in 2020, which is far below the replacement level of 2.1. It is similar to the fertility rates in Japan and Italy, which are home to some of the world’s oldest populations.

In contrast to developed countries with low fertility rates, however, China is still a developing middle-income economy with a limited social security net. Further, China does not take in significant amounts of immigrants, which puts further importance on domestic fertility to maintain the size of its workforce. By 2050, demographers project that the over 60 years of age population could make up one-third of the country’s total.

A shrinking working age population and a growing retired population would hamper China’s economic growth and strain social services. In 2019, the Chinese Academy of Social Sciences released a report projecting that urban pension funds could run out by 2035 due largely to demographic challenges.

The one-child policy also led to selective sex-based abortions, causing a sex imbalance to form over time. In 2020, China had 723.34 million men, compared to 688.44 million women.

Concerns Over The Cost Of Living

The relaxation of family planning restrictions may lead to a slight increase in births but is unlikely to meaningfully reverse China’s long-term demographic headwinds.

After increasing the limit to two children per couple in 2016, China experienced a short-term boost in birth rates for two years, before continuing to decline. At the time, the National Health and Family Planning Commission projected that the policy change would lead to between 20.82 million and 22.94 million births in 2018, but in reality there were only 15.23 million that year.

The principal reason for this discrepancy is that today, China’s low fertility rates have less to do with family planning restrictions, and more to do with the high costs of raising children. The competitiveness of China’s educational system requires significant spending on extracurricular education, such as after school tutoring, and quality childcare is another large expense.

Beyond education, real estate has become increasingly unaffordable in recent years. For example, the average cost of an apartment in Shenzhen in 2020 was 43.5 times residents’ average disposable income. Further, women often face strains on their careers when having children, while working adults of all ages suffer long working hours.

Because of these challenges, many families prefer to devote their resources towards raising a single child rather than multiple.

Alberto Vettoretti, Managing Partner at Dezan Shira & Associates, says that stronger supportive policy measures need to be introduced for the relaxations in birth limits to be effective.

“There would have to be a lot more incentives on the table in order to stimulate couples to have more babies,” Vettoretti said. “The current allowances offered are simply not attractive enough. Private consumption might also ultimately slow down as the burden to cater for the elderly will increase without the assistance of a safety net.”

Implications For Economic Development

China’s shrinking labor pool stands to hamper the country’s economic growth potential, particularly in labor-intensive sectors like manufacturing.

According to Vettoretti, “Factories are already under a very tight labor supply, while many processes cannot be fully automated. One of the most challenging aspects of running a factory in the Greater Bay Area nowadays is the availability of labor, triggering an increase in wages in order to attract or retain workers.”

Innovation and the adoption of automation could improve productivity per worker and offset some of the consequences of a smaller workforce. Vettoretti noted, however, that demographic challenges could also hamper China’s technological aspirations.

“A falling population, especially a declining young population in the 20-40 years of age bracket, may cause a decline in innovation and hunger to push China into the leading technological role it aspires to reach over the next decade,” Vettoretti said. ”With technology playing such an important role in shaping our future, a tech-savvy, dynamic, and young talent pool is need to achieve these goals.”

In addition to macro-economic concerns, Vettoretti pointed out that China’s demographics will further raise the importance of investments in elder care and healthcare.

“If we look at the potential impact on household size shrinking from 4.4 in 1982 to what looks like 2.5 over the next 30 years, there might be a huge problem in looking after elderly people, especially in rural areas as the younger generation gravitate around larger urban centers.”

Vettoretti concluded, “This will also impact the development of rural areas, which need to find a new driver to continue to grow and thrive."

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