China’s Consumer Babies

BEIJING – China’s leaders have now agreed to relax the country’s decades-old “one-child” policy. Couples now will be permitted to have two children if one parent is an only child (previously, both parents had to be only children), making the new rule applicable to most of the post-1980’s generation that grew up in urban areas. But, while the potential social consequences are obvious, the likely economic impact is less apparent.

When the one-child policy was implemented in 1979 – in an effort to alleviate social, economic, and environmental pressures following the population boom in the 1950’s and 1960’s – the fertility rate plummeted, from three children per household in 1970 to 1.2 in 1982. The household saving rate subsequently soared, from 10.4% in 1983 to a staggering 30.5% in 2011. Could the one-child policy have fueled this rise? If so, will the modified policy precipitate a reversal in this trend and, in turn, a consumption boom in the coming decade?

Rising fertility rates can lower the household saving rate in two main ways. First, children demand increased household expenditure – especially on education, which, for only children aged 15-22, accounts for 15-25% of total Chinese household expenditures (see figure 1). Second, with more children to support them in their old age, parents feel less pressure to save for retirement.