Economic Effects of China’s Two-Child Policy

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BY QUINN CAMPBELL

China’s shifting age demographic has finally forced Beijing’s hand: the party announced plans to completely phase-out its three decade old “One Child” policy, and to replace it with a new “Two Child” policy. The decision comes amid China’s slowest year of GDP growth since the global financial crisis.

By 2020, a fifth of China’s population will be over 60. That will weigh on China’s future growth. The policy changes are intended to combat the skewed age demographic, and to boost short-term consumption. Beijing’s official projections expect the two child policy will add an additional eight million new live births each year. However, these projections are overly optimistic, and represent a 166% increase in live births from last year. Financial realities and cultural norms will prevent the jump in fertility rates that Beijing expects. This article outlines the two reasons why China won’t experience a baby boom within the next generation.

Cost of raising one child.

China is an extremely costly place to raise a child. An average middle-class Chinese family spends about 40 percent of their monthly income on child rearing. Compare that to the U.S. where, according to a U.S. government study that examined spending on children, an average middle-class couple will spend only about 16 percent of their income on a child. The excess costs in China stem from its ultra-competitive school system. Chinese parents who want their child to get ahead must shell out big bucks for piano lessons, English classes, private tutors, or even college tuition in the U.S.

At 64 percent, China has the largest female workforce participation rate among the world’s ten largest economies, according to data from the World Bank, therefore the majority of Chinese parents cannot watch their child during the day. If grandparents aren’t around, then nannies or day-cares are another costly necessity. An economist from Credit Suisse put it best when he said, “the high cost of raising a child is probably China’s new birth control.” In China, it is already so expensive to raise one child, most parents cannot afford a second child.

Social Stigma of having two children.

Chinese people are accustomed to raising only one child. Birthing two or more children was illegal for over thirty years, so the current generation still considers it taboo. A local Nanjing cab driver, and father of one daughter, explained that the government took the social stigma into consideration when announcing their plan to repeal the policy. “The radio broadcast that announced the changes,” he explained, “said there would be an adjustment period.” However, demographic shifts don’t happen overnight. They’re long drawn out processes that occur on generational time-scales. The adjustment period Beijing described will surely be longer than expected.

Reality.

Beijing believed the One Child Policy could limit China’s population to 700 million people by 2020. That didn’t work, and I don’t expect the two child policy will either.