by Alyssa Oursler | November 21, 2013 2:49 pm
Say goodbye to China’s infamous one-child policy … kind of.
Last week, the Chinese government loosened the rules, which began more than three decades ago. Before the tweak, couples could only have two children if each spouse was an only child. Now, couples can have two children as long as one spouse is an only child.
However, the news didn’t just lift the likes of Chinese baby products stock Goodbaby International (GBBYF) and dairy company Mengniu Dairy (CIADF) — it took Chinese stocks as a whole for a ride, as seen in advances by Chinese funds including the iShares MSCI China ETF (MCHI) and iShares China Large-Cap ETF (FXI).
That’s because for a slowing economy with a shrinking labor force, the move is a step in the right direction.
However, investors considering a long-term bet on China should know that the step was a fairly small one.
Demographics have been a dark cloud hovering over China for some time now. A slight adjustment to the one-child policy hasn’t simply blown that concern away.
China’s current snail-like population growth has weighed on the economy in recent years, and still will be an anchor for decades to come. See, China’s working-age population has already peaked — in 2012, when the country boasted an extremely high proportion of these citizens.
Having a high proportion of working-age citizens — also know as having a low dependency ratio — is usually considered a catalyst for economic growth. But for China, its best days (demographically speaking) are already behind it.
The working population — the longest bars in the diagram above — will soon age, then become part of the dependent population. The issue there is that an increasing dependency ratio slows economic growth.
Heck, pensions have already become the most expensive function of the Chinese government. Don’t expect that to change; the number of people older than 60 in China is projected to balloon to 437 million by 2050. That would be around one-third of the population, which is around double the current percentage.
Meanwhile, China’s labor force is expected to lose 67 million workers between 2010 and 2030.
This problem is exacerbated by the fact that low birthrates — courtesy of the one-child rule — translate to a limited pool of people that can replace those aging workers.
Now, China bulls believe the loosened legislation will spur population growth and thus help China remedy its shrinking workforce. But there is a huge pile of question marks surrounding the theory that the new one-child policy will reverse this ugly trend.
As mentioned above, investors in Chinese stocks have been optimistic about the new one-child rule; Chinese funds MCHI and FXI have climbed around 8% in the past five trading days alone.
But despite such optimism, most experts are skeptical about the new one-child rule’s impact, for several reasons:
As a result, Wang Peian, deputy director of the National Health and Family Planning Commission, told state media that “China’s population will not grow substantially in the short term,” according to The Wall Street Journal.
And even down the road, the impact could be minimal. As Gwynn Guilford at Quartz wrote, “An extra injection of kids will make the decline of China’s workforce a little less steep after 2035, but it won’t reverse the trend.”
Still, investing in China did get slightly more appealing for the long haul — especially amid Chinese stocks’ cheapest valuations in months.
The loosening legislation isn’t going to boost the economy immediately, considering new kids will begin to enter the workforce in 2035 at the earliest — if they enter it at all. But it could help soften the coming demographic blow — or better, it could be foreshadowing for more similar legislation to come.
If that’s what you believe, the iShares MSCI China ETF and iShares China Large-Cap ETF are solid ways to play the country for the years ahead — especially as many other parts of the world (say, America) look anything but attractively priced.
But don’t think that Chinese stocks are now a long-haul home run because of one relatively minor tweak to a policy that has been in effect for decades.
It’s still going to be an uphill battle for the giant population as a huge chunk of it grays.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.
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