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The Real Math And Meaning Of China's Two-Child Policy

More consumer spending in the short term, and a demographic correction over time, but China's loosening of its birth policies may be most powerful as a symbol.

Time to take notes
Time to take notes
Jin Keyu*

-Analysis-

LONDON — China recently announced the end of its three-decade-long experiment in population control that left a signficant mark on Chinese society and economy. What is not clear yet is how much the loosening of its birth policy — raising the limit from one to two children —will affect the country going forward.

In the immediate term, the new policy is expected to stimulate consumer spending. Having more children means families spending more, especially for education-related goods. According to an urban household survey conducted in 2009, education-related spending accounts for 10.6% of budgets in families that have one child, but the number rises to 17.3% for two-child families. In parallel, family saving is expected to drop by between 7% and 10% with the new policy's implementation.

Not only will this stimulate overall consumption, it will also promote certain types of consumer products — everything from books to toys and bicycles. There will be more demand for education, and in a decade's time the need for more housing, life insurance and medicines will also increase.

But there is a contradiction of quality and quantity in the new policy. We have observed in China as well as in other countries that when the number of children increases, the investment in each child decreases. So compared with previous generations, China's per capita return on human resources is likely to drop.

When we compared twins versus only children, we found that the gap in the levels of their education is substantial by the time they turn 15. In fact, twins have a 40% greater likelihood of going to a vocational secondary school than an only child.

Even though there's a distinction between having twins and having two successive children — namely, that the latter families can spread out their spending — the research on twins can give us some idea of what may occur with the enforcement of the two-child policy.

Information we can't know

My concern is that we know very little about the natural birth rate. We have many reasons to believe that in urban areas the natural birth rate will remain well below two. So the two-child policy may not be reasonable because it will limit those who already have two children but want to have more, while at the same time having no impact on those who don't want children, or no more than one child.

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Learn to share — Photo: Coljac

The ideal number of children for urban households is probably very small. First, the expectation of parents that children will care for them in old age has weakened over time. Second, the cost of raising children has soared. Since 1996, the cost of education in China has risen a staggering 14.4% annually. That's on top of the enormous cost of living in Chinese cities. Third, as experience tells us, the richer a country becomes, the fewer the ideal number of children seems to be for a typical family.

Since the 1980s, the one-child policy has reduced the proportion of Chinese youth. Those under 21 represented 51% of the population in 1970, but that number had fallen to just 27% in 2010. Meanwhile, the over-60 set grew in representation from 7% to 14% over the same period. The two-child policy won't result in a quick fix to reverse China's aging trend, as it will take a least a generation to adjust.

It will be more important for us to know how many middle-aged people there are to support the elderly. The one-child generation born after the 1980s will on average have to support two elderly people. It won't be until the two-child generation reaches middle age that China's demographic problem will be reversed.

But I personally don't believe the demographic dividend is the most important factor in determining China's economic prospects. I would attach greater importance to labor productivity and human resources. Since the 1960s, per capita Chinese productivity has grown 12 times over. Even if China's labor force doesn't grow, China can still effectively increase its labor force with better productivity.

The country's productivity has an annual growth rate of 12%, far more substantial than the potential decline in the labor force. Besides, newer generations are richer than previous generations, so not as many young people are needed for inter-generational support. For instance, the income of newly employed people in 2010 was five times higher than it was in 1970.

We shouldn't fall into the trap of overemphasizing demographics and underestimating the importance of accumulated human capital and productivity. The two-child policy may be more important as a symbol — of the beginning of a new era, China's "new normal."  

* Jin Keyu is an assistant professor at the London School of Economics.

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