Morningstar Magazine - June/July 2017 - 60

Spotlight: The Future of Investing

China's Next 10 Years
Demographic change will reduce growth
and reshape the economy.

CHINA

Daniel Rohr and Chok Wai Lee

face stiff headwinds as urbanization slows and
construction decelerates.
Fertility

This article is the first in a four-part series on China's
next 10 years. Forthcoming articles will discuss
growth and productivity, rebalancing, and debt.
The influence of demography is often imperceptible
quarter to quarter or year to year. But over
the long term, it can prove decisive. For much of
China's past 30 years, demography aided
extraordinary growth and supported an
increasingly investment-heavy economic model. In
the next 10 years, demographic change will drag
on growth rather than drive it, and radically
reshape China's economy. The seemingly limitless
supply of "surplus" rural labor, which fueled
rapid urbanization and productivity gains, will
begin to dry up. The working-age population
will contract, just as the senior population surges.
China's unusually high support ratio-the
number of working-age adults for each child
and senior-will fall, draining the pool of savings
that has supported the past few decades'
feverish pace of construction, but stabilizing
consumption growth as the overall economy
slows. Recent efforts to address looming
demographic challenges by boosting fertility will
prove too little, too late.
A reversal of many long-standing demographic
trends in the world's second-largest economy will
have profound implications for investors
globally. To name just a few, companies that sell
infant formula and diapers will find the next 10
years to be demographically challenging,
healthcare firms that can get a toehold in China
today should enjoy a once-in-a-generation
tailwind, while many miners and manufacturers

Morningstar June/July 2017

Looser family planning laws will not avert an
eventual plunge in births.
If demography is destiny, the future begins with
fertility. Many of the changes China will
see over the next 10 years-slowing population
growth, a shrinking labor force, and a
rising support ratio-are consequences of a
premature fertility crash caused by harsh
family planning laws.
The Chinese government has a long history of
meddling in reproductive decisions. Initial efforts
to manage population growth began in the
early 1950s, after the population eclipsed the 500
million mark, but had little effect. A renewed
push to curb births came in 1970 with the
"Triple L" policies, which prescribed late marriage,
long birth intervals, and little families. From
1970 to 1980, China's total fertility rate (the
number of births a woman might expect to have
in her lifetime) plunged from 5.7 to 2.6, an
unprecedented drop for what was still a poor and
largely agrarian country. The one-child policy,
implemented in 1980, had comparably less
impact on fertility, which fluctuated between 2.5
and 2.6 births per woman in the following
decade. Then, from 1990 to 2000, despite no
major further tightening of family planning laws,
fertility fell again, slipping to 1.45 in 2000.
Fertility fluctuated between 1.5 and 1.6 for most
of the 2000s, well below the replacement
level of 2.1 births.
Persistently low fertility prompted concerns that
China would "grow old before it grows rich."

In the past few years, the government began to
loosen restrictions. Beginning in 2016, the
two-child policy went into effect, contributing to
an 8% increase in births (from 16.6 million to 17.9
million) and boosting fertility to 1.7. Relaxed family
planning laws have prompted some to speculate
that China's fertility rate will continue to rise.
We're more circumspect. Surveys of Chinese
couples' childbearing intentions suggest economic
considerations, not legal restrictions, largely
explain China's low fertility rate today.
China would not be unusual in this regard.
Rising incomes are associated with falling fertility
globally. This is a consequence of a variety
of factors. For example, female workforce participation and college education facilitate income
growth but also tend to depress fertility by
delaying marriage and births. Urbanization and
industrialization are also linked with both income
growth and falling birthrates. For agricultural
households, larger families can be advantageous,
because children can be put to work on
the family's plot. For urban households, where
education is a prerequisite to success, larger
families can be a disadvantage as they leave less
to invest in each child. For China, decades
of high-income growth and urbanization have
changed the economic logic of family size.
While China's fertility rate of 1.7 is low for a
middle-income country (2.2 is the norm), it's typical
of neighboring countries' historical experience
( EXHIB IT 1 ). Japan, Korea, Taiwan, and
Thailand, none of which enforced compulsory
birth control, had similarly low fertility rates at
comparable points in their economic development.
Had the government liberalized family planning
laws in the 1980s or 1990s, it might have
been reasonable to expect a sustained fertility
increase. That seems unlikely today. Although we
expect 2016's fertility gains will be largely
maintained in 2017 as pent-up demand for a
second child is released, those gains are likely to
prove temporary.
While we don't forecast a significant drop in
China's fertility rate, a major decline in births is
nonetheless likely. That's because the population
of childbearing-age women is set to fall over

Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017