China is thinking about scrapping birth limits -- but that won't have the impact it's hoping for

Johannes Eisele/AFP/Getty ImagesChinese President Xi Jinping
  • China is reportedly considering ending its two-child limit.
  • The country is facing a demographic crisis and ageing workforce.
  • But some analysts doubt that the policy change will have much of an effect.

As China mulls lifting birth limits in efforts to shift its ageing workforce, analysts remain sceptical.

Bloomberg News reported Monday that the State Council is planning to end its two-child limit, a move that could signal increasing anxiety around a demographic crisis that has loomed over the the country for years.

China has for decades regulated the number of children each household is allowed, a controversial system that has pushed fertility rates to among the lowest in the world and led to a worker shortage in the second-largest economy. The Chinese government estimates the working-age population will fall by about 700 million, or nearly 25%, by 2050.

But analysts are doubtful policymakers will be able to shift the trajectory of population growth in the country, which they say is influenced by outside factors. Those include high living costs and pursuit of professional goals in urban parts of China, Credit Suisse research analysts Vincent Chan and Pearl Xu wrote in a note to clients.

“If the key driver of declining birth rates is that families are delaying having children as women focus on their careers or because they feel the costs of raising a child are prohibitive, then giving them permission to have a third child won’t have a big impact,” Julian Evans-Pritchard, a senior economist at Capital Economics who specialises in China, said.

After China lifted its one-child limit in 2015, Chan and Xu said there was no notable increase in the number of second-child births that year. In fact, birthrates in the country were already declining before the one-child law was put in place, according to a Federal Reserve report.

Screen Shot 2018 05 22 at 2.49.26 PMCapital Economics

“If the birth-control policy is completely relaxed, it would take some time to impact the population and would largely depend on the availability of supporting social infrastructure and services,” Chan and Xu said.

And even in the long-run, demographics may not change by a significant amount. Credit Suisse estimates population growth would not even crack 1%, a level the country hasn’t seen since the 1990s.

A new policy may be even slower to impact the country’s worker shortage. Credit Suisse estimates it would take at least two decades until the declining workforce trend could be reversed.

Demographic trends could subtract 0.5 to 1 percentage point from the country’s annual GDP growth over the next three decades in countries such as China, the IMF said in a report last year.

For one, the government will face higher costs through increasing pensions and healthcare costs. China spent about 8.2% of gross domestic product on public pensions in 2016, according to OECD data, and that ratio is expected to steadily rise.

Further pressuring the Chinese fiscal position, a smaller workforce would shrink the tax base and government revenue.

“A sizeable demographic headwind is therefore all but inevitable over coming years, compounding the slowdown in economic growth that is likely as China’s investment-driven model runs out of steam,” Evans-Pritchard said.

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