The relaxing of the one-child policy is being viewed in some corners as a potential fix to China’s rapidly ageing population, which threatens to stifle its economy.
As noted previously, the one-child policy was implemented in 1979 and is credited with preventing around 400 million births from 1979 to 2010. This policy initially produced a population pyramid optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age).
However, the demographic blessing provided by the one child policy is expected to turn into a curse, with the United Nations forecasting that the number of working aged people to dependents is set to almost halve over the 50 years to 2065, from a peak of 1.9 workers to dependents in 2015 to only 1.0 by 2065.
In fact, China is currently facing very similar demographic challenges to those experienced by Japan two decades ago. Like China now, the Japanese economy was toast of the world in the mid-to-late 1980s, but hit the wall from 1991 when its joint property and stock market bubbles collapsed and its working population began to shrank.
To illustrate, consider the following graphics.
First, the population pyramid of Japan in 1990 versus China in 2010. As you can see, they are very similar:
Second, Japan’s dependency ratio in the 1990s – i.e. the ratio of the non-working population, both children (< 20 years old) and the elderly (> 65 years old), to the working age population – is very similar to China’s in 2010:
As are the the profiles of the number of working age people per dependent:
Of course, a major difference between China and Japan is that Japan was a very wealthy country when its demographic time bomb exploded, with per capita incomes exceeding that of most other Western nations. By contrast, China’s per capita income is currently well below those of the West, which will make the transition to an ageing society all the more difficult.
A perverse impact from relaxing the one-child policy is that it could actually make China’s demographic profile worse before it gets better. In addition to supporting the ageing population, workers would now also be required to support a growing number of younger dependents, thus worsening China’s dependency ratio over, say, the next 20 years (but improving it thereafter).
Therefore, while liberalising the one-child policy should ultimately assist in rebalancing the Chinese economy towards domestic consumption – since younger people tend to spend a higher share of their income than older people – such benefits will take many years to realise, and the reforms will likely be a drag on the economy in the short to medium term.