China’s Courage And Vision In Ending One-Child Policy

Business, China, Company Strategy, Europe, Japan, Polyolefins, Sustainability, US

ChinaDemographics8Nov2013

By John Richardson

CHINA’S decision to scrap its one-child policy will obviously not make any significant difference to labour  shortages for at least the next 20 years or so as that is how long it will take all the new children to grow up and join the workforce. This is assuming there is a sudden and big rise in fertility rates – and that’s a big assumption given China’s high cost of living and the end of free family childcare support because of the migration of hundreds of millions of workers from the countryside to the cities.

This means that for the next two decades at least, China will still have to cope with nothing short of the disastrous consequences of its failed one-child policy. These consequences include meeting huge pension and healthcare bills when per capita income levels, and so per capita taxable income, remain way behind those in the West.

The loss of some 400 million babies, who would otherwise have been born if the one-child policy hadn’t happened, also means that its working population has already started to shrink. This has brought forward the challenge that China was always going to have to eventually confront: The “middle income trap”.

What makes things even harder for China is that this is happening just as the West sinks into its own ageing-populations crisis.  There will be no strong export markets for Chinese manufacturers that could have helped pay for China’s vast new army of old people.

But some of the commentators reacting to the end of the one-child policy have failed to give credit where credit is due. For me, this is a bold admission of failure by China.

The courage of owning up to this mistake is even greater because the announcement occurred during China’s critical Fifth Plenum Meeting, which finished yesterday. I shall examine the outcomes of this meeting in detail next week.

But in short here, I think that the nature and timing of this announcement show a willingness to break with the past, and is thus in keeping with Xi Jinping’s iron-hard resolution to press ahead with a highly contentious and risky wider reform process.

He feels that he has no other choice. He is absolutely right, as going back to the past would be economically, socially and environmentally disastrous for China. What would be disastrous for China would also be the same for the rest of the global economy, given China’s outsized role in growth in global consumption of everything from polypropylene to automobiles.

Knowing and doing what is right rarely happen at the same time in politics. People should therefore praise Xi, and China’s other senior leaders, for having the guts to make this largely symbolic decision.

This decision also tells us that China’s leaders have accepted what should be obvious to politicians everywhere else in the world: Demographics drive demand. Once you have accepted this incontrovertible statistical fact, you can start devising sensible policies to deal with the problem.

Not so in Japan, where there are now a staggering seven pensioners to every ten salaried workers.  Yet the policy solution to this problem for the last two years has been loads of wasted economic stimulus in the hope that this will raise inflation through raising inflation expectations. But with only three workers to every seven retirees, this is mathematically impossible.

What’s Japan’s next step? Quite possibly an announcement today of even more stimulus by the Bank of Japan and governor, Haruhiko Kuroda, following a September inflation rate that contracted by 0.1%.

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