China’s missing baby boom

With fewer babies currently being born in China compared to earlier years, it is expected to affect demographic development in the long-run, but it will immediately impact the Chinese consumption pattern.

The economic growth during the past decades throughout Asia has led to a marked decline in fertility rates. It is not unusual that fewer babies are born when a country explores a rising wealth. In Asia, Japan is known for its outspoken demographic challenge due to a growing proportion of elder people in the population. But in China, the one-child policy was almost completely abandoned with effect from January 2016, in the hope of avoiding the Japanese demographic challenge, though it is apparently not easy to control birth rate.

Graphic one shows quite a dramatic drop in the number of births in 2018 in China, where only 15.23 million babies came to the world. This is in sharp contrast to the expected 21 to 23 million newborn babies in 2018, which was the official prediction when China skipped the one-child policy in January 2016.

The decline in the number of births from 2016 to 2017 was officially played down with the comment that a fertility trend should be observed over a longer period, which is correct. However, last year’s development is so significant that it is hardly a random fluctuation, and some projections now forecast that in 10 years, only 8 million babies will be born annually in China.

I have not seen any official figures yet, but the fertility rate maybe decreased to around 1.3 in 2018, which is very low. I could imagine it might become a theme when China’s Communist Party launches its Congress in Beijing in a few weeks. A next political step could be to lift the last restrictions from the one-child policy. My assessment is that in practice, it does not result in any significant change. This view is supported by several surveys done among families, where typically less than 10 pct. of the respondents mention governmental birth control as a reason for not having more children.

Economic analyses often point to the challenges for the public finances arising due to the growing proportion of older people in the society. This development is similar to that in many other countries, but China still has some opportunities to create a counterweight to this development.

Back in 1979, the average life expectancy in China was 66 years, and now stands at 76.4 years, and is still rising. This is actually very close to the expected average life expectancy in for example, the United States, where it is 78.5 years. As graphic two shows, the retirement age in China remained very low, and therefore, China has the opportunity to increase the retirement age, thus keeping people longer on the labour market.

I also argue that via efficiency improvements, the Chinese agricultural sector can free-up a minimum of 200 million workers who can work in other business sectors. However, this requires reforms in the entire agricultural sector, which the current government isn’t likely to adopt. But the key is that China has the opportunity to counterbalance the macroeconomic challenge caused by the demographic changes – unlike many other countries.

In my view, the dropping fertility is partly an expression of global trends, but of course, also due to social changes in China. Around the globe, the number of singles is growing, which has led to a decrease in births in many countries, this also applies to China.

Again, several surveys among Chinese show the same statements- single life is fun, or a family life is immediately overwhelming. Further, more Chinese women of fertile age have their own career, and therefore do not need to marry for financial security reasons.

Less than ten years ago, it was typical in China to get married around the age of 22, but now it has moved to an age of around 27 years. As an example of how the rapid the changes in China always are, people also marry later in Thailand, but it has taken 50 years to move the average age from 25 to 28 years (for men).

It is possible that the desire for a family increase shifts to a higher level again, but one should not underestimate that the trend in the direction of fewer births seems most likely. Demographic projections forecast that in 10 years, there will be 40 pct. fewer 23 to 30-year-old women in China than today.

In my opinion, the current and coming demographic changes give reason to adjust investments in China in an ongoing basis. It is obvious that an increasing number of single households and fewer newborn babies change the consumption pattern in the retail sector.

Another example is the education of children, where several consumption studies show that more than 90 pct. of families with children spend money on educating the child / children. It can be anything from learning to play the clarinet to learning a foreign language. Also, public-listed companies have been successful in building educational businesses – it does not take long before investors recognize that the market for education might shrink, just as another example of investments that investors might reconsider due to the lower fertility.

Housing prices in China have gone up, which, together with the strong urbanisation, means that every square meter of housing in the cities has become particularly expensive. The consequence is that a growing number of families simply say that they cannot afford another child because a bigger flat would be too expensive.

This economic challenge for families, I argue, can only be overcome by government support like a child allowance or similar economic support.

To reverse the declining trend in the fertility rate, it is my opinion that the government needs to develop a kind of crèche and kindergartens until children start to attend the pre-school or school. This is another potentially increasing burden for the public finances i.e., it would mean another increase in the budget deficit.

I cannot foresee when the Chinese government is willing to increase this kind of public spending, though it is probably not right now – therefore, my focus is on changes in the consumption patterns due to lower fertility.