China’s Two-Child Consumption Engine

LONDON – The announcement in October that China is terminating its one-child policy marks the end of a 37-year historical aberration that has accelerated the country’s demographic aging by decades. The social and economic consequences of the authorities’ drastic population controls, which reduced the average fertility rate in urban households from about three in 1970 to just over one by 1982, have been dramatic. The question now is whether, and to what extent, the country’s new two-child policy will mitigate those consequences.

In fact, the impact of the two-child policy is likely to be just as far-reaching – and, overall, much more positive – than that of the one-child rule. This is especially true in the long term, but the effects will become apparent even in the relatively shorter term. One key reason for this is that an increase in the number of children per household will force a reduction in the aggregate savings rate, fulfilling a long-standing macroeconomic goal.

China’s current saving rate is so high that it is often blamed for fueling global imbalances and driving down interest rates worldwide. Moreover, it is a major obstacle in China’s ongoing transition from an export-led growth model to one based on domestic consumption and services. The two-child policy may prove indispensable in propelling this transition – a process that will begin sooner than most observers anticipate.

So far, economists have focused largely on the impending shifts in China’s demographic structure. Driven by the one-child policy, the share of China’s population under the age of 20 fell from 51% in 1970 to 27% by 2010, while the share of people aged 60 and up rose from 7% to 14%. As a result, the median age increased from about 20 to 35.