Liaoning, Jilin and Heilongjiang have long been grappling with a shrinking population.  Photo: Xinhua
China has replaced its two-child policy with a three-child guidance. Photo: Xinhua

One of the most well-known facts about China is the enormous size of its population. What many do not realize is that, even with over 1.44 billion citizens, the “sleeping dragon” is still struggling to boost its birth rate. The reasons for that are not only the former one-child policy, or the two-child limit that replaced it in 2016, but also the increasing cost of raising children.

Back in 2005, the cost of raising one child in China was around 490,000 yuan, or about US$75,000. By 2020, this number had multiplied by four, to 1.99 million yuan.

Before having a child, potential future parents must weigh their capability to face school fees, extracurricular cram classes, the cost of purchasing a house in a top school district, etc. In Shanghai, for example, low-income families, defined as those with an annual household income of less than 50,000 yuan, spend an average of 70% of what they earn on their children.

Thus, as is the case in Western culture, most families and especially women in China now have to choose between career and parenting. Couples who can’t foot the bill will naturally choose to have fewer children – or even forgo them once and for all. In this context, it is very unlikely that with the new three-child policy announced on Monday, things will be miraculously solved. 

The question then arises, what can the Chinese government do to solve this problem?

First, policymakers should identify the biggest parenting costs and provide some sort of subsidies to cover them. The second and probably the most important thing is that companies should extend parental leave and ensure that parents have the ability to take it without facing discrimination. 

Meanwhile, the Chinese population is aging. It is projected that one-quarter of the population will be over 60 by 2030. If current trends continue, in less than 10 years, the country could enter an era of negative population growth. There simply won’t be enough people to sustain China’s public pension system.

According to the latest census, the average family size in China was 2.64 people. That means that not every family has even one child, let alone two. Over the past 10 years, population growth in China has slowed to 0.53% per year. Soon enough, China could be at risk of losing its demographic advantage.

It is worth mentioning that already in 2019 the Chinese Academy of Social Sciences forecast that the value of the national pension fund would peak at 6.99 trillion yuan (US$985 billion) in 2027 before gradually running out by 2035. The situation got even worse during the pandemic as micro, small and medium-sized firms were exempted from paying contributions to provincial funds for pensions. 

As in Europe, an increasing number of pension plans are in deficit – meaning payouts to retirees are greater than contributions from wage earners. In this context, there is a high probability that China will have to raise the retirement age eventually or even increase taxes.

Meanwhile, the pension system will continue to depend on the speed and scale of the aging of China’s population, the collective savings of the public and private sectors, as well as government policies. 

For now, markets have reacted positively to the news of the three-child policy. In particular, stock prices rose for reproductive and perinatal-health-care companies like Aidigong Maternal & Child Health, Jinxin Fertility, and Suzhou Basecare Medical Corporation. Probably this reaction was a one-time speculative move, but who knows, maybe this time China will succeed in stimulating another baby boom.

Igor Kuchma

Igor Kuchma is a financial adviser who is passionate about economy and the capital markets in general. He has experience working with Russian, Spanish and American financial institutions. He helped to compile a course for the Series 7 exam, while some companies he has prepared investment portfolios and macro and microeconomic models in Excel, and has studied trends and historical data.