In 1979, Deng Xiaoping implemented the one-child policy after a party official named Song Jian calculated what he saw as China's optimal population: 700 million people, which the country had surpassed in 1965. The impact of this social experiment is difficult to measure. In 2006, a Chinese official claimed that 400 million births had been averted. UNC-Chapel Hill professor Yong Cai and Brookings-Tsinghua Center for Public Policy director Wang Feng challenge that claims, putting the number at 200 million.
The facts seem to support the more conservative estimate. Fertility in China fell sharply in the 1970s, before the policy was implemented, and changed little in the years after it went into effect:
This drop-in fertility was partially offset by a 74% increase in life expectancy at birth from 1960 to 2013 (plotted above), and China's population more than doubled in that period. On the other hand, annual population growth has slowed and even fallen behind the United States' rate, which was 0.716% in 2013.
Lower fertility rates and slower population growth are characteristic of industrialized countries. The United States is able to maintain population growth and a bottom-heavy age distribution pyramid primarily due to immigration. Otherwise, the United States would look more like Latvia, Lithuania, Greece, or the 13 other European countries that, according to World Bank data, experienced population declines in 2013.
Immigration to China is minuscule, so as the country's economy developed in the past few decades, it's likely that its fertility and population growth rates would have fallen with or without the one-child policy. There are numerous exceptions to the law, and enforcement varies by jurisdiction. Wang Feng points out that China and Thailand, which has no one-child policy, "have had almost identical fertility trajectories since the mid-1980s."
That's not to say that the policy has had no effect. It's taken an enormous personal toll on the women who have suffered forced abortions and sterilizations. It's led to a gender imbalance at birth due to sex-selective abortions. This preference for boys is even officially recognized: rural families who have a girl are often allowed to try for a boy. According to UN forecasts, the gender imbalance at birth may persist until 2060.
The Economist reports that the effects of a skewed sex ratio at birth are compounded down the line. By 2050, there could be anywhere from 186 single men in China for every 100 single women. The best-case scenario is a peak of 160 in 2030. The "marriage squeeze" has already been associated with an uptick in violent crime in China, and will get worse before it gets better.
China has been the textbook beneficiary of the demographic dividend in its transition from an agrarian to an industrial economy. This phenomenon results from a fall in child mortality rates, which in turn leads families to have fewer babies. As a result, for a few decades, a large cohort of workers enters their prime earning and spending years, boosting output and consumption, while the proportion of older (65+ years old) and younger (0-14 years old) dependents remains relatively small.
According to Keiichiro Oizumi, Senior Economist at the Japan Research Institute, China's demographic dividend is just about spent. In 2011, he predicted that China's "productive age population" (15-64 years old) would begin to decline as a proportion of the whole in 2015. Assuming a constant birth rate, China's population would begin to decline by 2030.
China owes some demographic back-taxes. The oldest Chinese baby boomers are now in their 60s. That generation's children formed a second boom in the 1990s and have their working lives ahead of them, but the age-distribution pyramid is still becoming worryingly top-heavy.
One consequence of this demographic inversion is the so-called 4-2-1 family structure: four grandparents, two parents, and one child, whose earnings the other six may all depend on. Exceptions have been in place for parents who are both only children for some time. As dependents pile up, however, the government is increasingly concerned with raising the fertility rate.
In 2013, one of Xi Jinping's first actions as China's leader was to allow couples to have a second baby if either parent is an only child. The change was supposed to catalyze the fertility rate, with two million couples projected to apply for a second pregnancy in 2014. The turnout disappointed: 800,000 couples applied in the first nine months of the year. For the working only-child with two retiring parents and four elderly grandparents to care for, providing for two children is a hard sell.
Opportunities in Healthcare
Following the 2013 reform, investors were exuberant about another baby boom. Shares in everything from makers of paper products (to clean up after messy tots) to pianos (because each child needs its own) rose, while shares in at least one contraceptives maker fell.
These were probably poor bets. China's fertility rate might inch upwards, but the larger trend will be towards an aging society with fewer productive workers. Together with a rise in non-communicable diseases caused by pollution and other factors, this prospect creates opportunities in China's burgeoning healthcare sector.
McKinsey & Company estimates that health care spending in the country will reach $1 trillion in 2020, up from $350 billion in 2011. Foreign direct investment is increasingly welcome: foreign ownership caps on hospitals have been eliminated in the Shanghai Free Trade Zone and raised to 70% elsewhere. Remaining caps are expected to disappear eventually. The country's largest radiotherapy and diagnostic imaging center network, the Concord Medical Group (CCM), trades as an ADR.
The private insurance market is also opening up, though 90% of the population still depends on state-funded insurance. American International Group Inc. (AIG) owned just over a quarter of the Hong Kong-traded shares of one of China's largest private insurers, PICC Property & Casualty Co., selling its stake in 2016.
Medical devices provide another opportunity to invest in China's healthcare sector. The largest Chinese manufacturer, Mindray Medical International Limited (MR) went private in 2016. An indirect play is Becton Dickinson & Co. (BDX). The company bought C.R. Bard for $24 billion in 2017, which gave it a large presence in China.
Drug makers may be a bad point of entry. In 2014, GlaxoSmithKline (GSK) was fined almost $500 million for corruption charges, 10 to 20 times the expected amount. The case sheds light on the heightened political vulnerability of multinationals during the country's latest corruption crackdown, as well as the waste pervading China's pharmaceutical industry. Over-prescription of drugs is rampant, and corruption accounts for an estimated 20-30% of drug prices.
The Bottom Line
Despite recent reforms to the one-child policy, China is not getting any younger. Rather than betting on a baby boom, investors should explore opportunities in the healthcare sector, which is growing rapidly and increasingly open to foreign investment. Caution is recommended, though, as corruption is rife, and political uncertainty is rising.