China’s One-Child Policy Revision a Positive Step, But Unlikely to Reverse Demographic Challenges

 

NOVEMBER 3, 2015 [EMERGING MARKETS, CHINA]
Ben Kirby, CFA


A positive step, but correlation between rising incomes and falling birth rates still holds

China has announced a modification to its long standing one-child policy, now allowing eligible couples to have two children. The one-child policy, introduced in 1978, has been enforced through fines, forced abortions, and mandatory sterilization, and has faced increasing criticism both inside and outside of the country. While there have always been exceptions to the rule – ethnic minorities, rural families, and couples who themselves were only children, for example – this is the broadest loosening of restrictions in nearly 40 years.

The one-child policy may have helped China to maximize its demographic dividend and to spur economic development over the last few decades, but it also created social imbalances with long-term consequences. “The ratio of children in the population has been dwindling, creating a potential future shortage of workers,” Mu Guangzong, a demographics expert at Peking University, was quoted on China’s State Council website as saying. In 2015, China had 130 pensioners (age 65+) for every 1,000 working-age persons (age 15-64). By 2050, the United Nations estimates there will be 467 pensioners for every 1,000 working-age persons. While this change will occur gradually over a 35-year period, the impact on the economy can be profound. We expect demographic dynamics to drive lower potential economic growth, lower inflationary pressures, and lower equilibrium interest rates. China’s reported third-quarter gross domestic product grew 6.9%, and benchmark one-year interest rates stood at 4.35%. We expect both of these figures to trend lower over time.

 

Chinese Demographics

Source: United Nations, Department of Economic and Social Affairs, Population Division

 

 

Old Age Dependency Ratio

Source: United Nations, Department of Economic and Social Affairs, Population Division

 

Given China’s dependency ratio, investment opportunities may be greater at the graying end of the country’s demographic spectrum, as noted in an Emerging Views article on emerging market private hospitals. A few infant-oriented consumer sectors may experience better demand, but we don’t expect the relaxation of the one-child policy in China to spur a baby boom in the coming years, given the correlation between rising incomes and falling birth rates. We do, however, applaud the country for this reform and hope to see more social and economic reforms in coming years.

Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit our literature center. Read them carefully before investing.

Investments carry risks, including possible loss of principal. Additional risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments in small- and mid-capitalization companies may increase the risk of greater price fluctuations. Investments in the Fund are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.

The performance data quoted represents past performance; it does not guarantee future results.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Please see our glossary for a definition of terms.

Thornburg mutual funds are distributed by Thornburg Securities Corporation.

Thornburg Investment Management, Inc. mutual funds are sold through investment professionals including investment advisors, brokerage firms, bank trust departments, trust companies and certain other financial intermediaries. Thornburg Securities Corporation (TSC) does not act as broker of record for investors.