Is China's two child policy a boon for investors?
03 November, 2015
What are the investment implications of China's move to a two child policy?
Last week the China news agency reported the impending removal of the one child policy which was introduced as a temporary measure back in 1979. This change is clearly designed to reverse declining population that is forecast to occur from 2030 onwards.
But it's not just the decline in population that's the problem. It's the composition of the population because the number of people in the 25 to 49 year age group is forecast to decline from next year onwards which is an immediate problem.
So with this news, the first thing share market investors are doing is looking for companies that stand to benefit from this change. Would it raise demand for larger homes? The stocks of property developers rose last week, a stroller company in Hong Kong saw a 6% gain. Education providers are another example of companies that have seen gains.
Also infant formula companies. We have followed this closely because we own shares in a US company called Mead Johnson, which manufactures infant formula for the Chinese market. The controversy that this company faced was that Chinese demand for infant formula had slowed but that is set to recover. Even piano companies are expected to benefit. I wonder why can't the youngest child learn on the same piano as the older child?
What about the broader economy?
It's all about dependency ratios. This is the ratio of working age people to children and retirees, and swings in this ratio are what cause the problems. As fewer people work it makes it harder to generate the growth required to maintain everyone's lifestyles. Hence my earlier comment that it is the composition of the population that matters almost more than the overall increase or decrease.
It is possible that China's new policy may not achieve the desired effects. We've already had an indication of this because in 2013 they partially relaxed the one child policy, allowing two children per family if one of the parents is an only child. But the Wall Street Journal reports that only about 7% of eligible couples had applied for a second child under this policy.
So it appears that as incomes rise the cost to staying at home goes up. When one partner stops work to raise children there is an effect on lifestyle and Chinese couples are in no hurry to do that. The country might get some population growth but it might comes with a reduction in the workforce and lower household incomes.
So achieving population growth can comes at the expense of productivity and may not be the panacea that policy makers hope.
Any implications for New Zealand?
An obvious positive is demand for our exports. China is our largest trading partner and we sell them lots of food. So it should be good.
But there are also some lessons in terms of the connection between population growth and economic growth.
Just this week Westpac forecast NZ GDP growth to slow to 2% next year (which is not too bad considering); yet per capita GDP growth will be zero. How can that be? How can we be trucking along at 2% and everyone's pay checks are unchanged?
The difference is population growth. The pie is getting larger but it is being cut into more slices. 60,000 to 80,000 more slices in the case of New Zealand.
We also have a compositional problem with an ageing population. NZs dependency ratios are deteriorating but for different reasons from China. Ours is due to too many 60 year olds while China's is due to a lack of 25 year olds.
But in both countries, simply increasing population numbers might not be the answer.