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  • Home>Research & Insights>Spotlight>China’s Next 10 Years

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    China’s Next 10 Years

    Demographic change will reduce growth and reshape the economy.

    Daniel Rohr, CFA and Chok Wai Lee, 06/09/2017

    This article is the first in a four-part series on China’s next 10 years. Forthcoming articles will discuss growth and productivity, rebalancing, and debt.

    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, demographic change will drag on growth rather than drive it, and radically reshape China’s economy. The seemingly limitless supply of “surplus” rural labor, which fueled rapid urbanization 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 fall, draining the pool of savings that has supported the past few decades’ feverish pace of construction, but stabilizing consumption growth as the overall economy slows. Recent efforts to address looming demographic challenges by boosting fertility will prove too little, too late.

    A reversal of many long-standing demographic trends in the world’s second-largest economy will have profound implications for investors globally. To name just a few, companies that sell infant formula and diapers will find the next 10 years to be demographically challenging, healthcare firms that can get a toehold in China today should enjoy a once-in-a-generation tailwind, while many miners and manufacturers face stiff headwinds as urbanization slows and construction decelerates.

    Fertility
    Looser family planning laws will not avert an eventual plunge in births.

    If demography is destiny, the future begins with fertility. Many of the changes China will see over the next 10 years—slowing population growth, a shrinking labor 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, after the population eclipsed the 500 million mark, but had little effect. A renewed push to curb births came in 1970 with the “Triple L” policies, which prescribed late marriage, long birth intervals, and little 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 what was still a poor and largely agrarian country. The one-child policy, implemented in 1980, had comparably 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.

    Persistently low fertility prompted concerns that China would “grow old before it grows 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. 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 both income growth and falling birthrates. For agricultural households, larger families can be advantageous, because 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 leave less to invest in each child. For China, decades of high-income growth and urbanization have changed the economic logic of family size.

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