What it means
The policy was introduced at the end of the 1970s to slow population growth, and it was enforced through incentives and penalties that varied by region and group. There were exceptions, for example for some rural families and ethnic minorities.
It was relaxed in stages, replaced by a two-child policy from 2016 and followed by a three-child policy in 2021. The effects on the economy were large.
For years, fewer children meant fewer dependents per worker, which boosted household saving and economic growth and is sometimes called the demographic dividend. Later, as the generation born under the policy aged, the number of workers started to shrink and the number of retirees to rise.
This shift increases the old-age dependency ratio, which compares the number of older people with the number of working-age people. A higher ratio puts pressure on pension and healthcare systems because fewer workers support more retirees.
Governments and companies must therefore plan for rising costs and labour shortages. The policy also affected family finances.
A single child often meant that two parents and four grandparents focused spending on one household, boosting education and housing demand. At the same time, adults had to plan for their own retirement with fewer children able to support them.
For businesses, demographic change creates both risks and opportunities. Demand falls for products aimed at children, and rises for healthcare, elder care and automation.
Investors studying any country should look at the age profile, because it is one of the more predictable drivers of long-term economic trends. Policy changes since 2016 show how hard it is to reverse such a shift.
Birth rates did not rebound quickly after the rules were relaxed, because the cost of housing and education, women's work choices and changing family preferences all matter. Planners therefore treat the age profile as a slow-moving fact and build their forecasts around it.
In practice
Real-world examples.
Example
A global asset manager builds a long-term forecast for consumer spending in Asia. She adjusts the projections for a shrinking working-age population and rising demand for healthcare. The model moves investment towards elder care and away from toys and baby products.
Example
A manufacturer with factories in China notices that wages are rising as the supply of young workers declines. Its finance team calculates that labour costs will rise by 6% a year and approves a $15 million investment in robots.
Example
A pension actuary compares the age profiles of several countries to estimate the future cost of state pensions. The country with the highest dependency ratio shows the largest gap between contributions and payments. She advises clients to treat it as a long-term risk.
Formula
Calculation
Old-age dependency ratio = (population aged 65 and over / population aged 15 to 64) x 100
Suppose a region has 150,000,000 people aged 15 to 64 and 30,000,000 people aged 65 and over.
Ratio = (30,000,000 / 150,000,000) x 100 = 0.20 x 100 = 20%, so there are 20 older people for every 100 working-age people.
If each older person receives a pension of $4,000 a year, the total bill is 30,000,000 x 4,000 = $120,000,000,000. Spread across the working-age population, that is 120,000,000,000 / 150,000,000 = $800 per worker per year.
If the ratio rose to 30% with the same pension, the bill per worker would be 0.30 x 4,000 = $1,200.Case study
Seen in the real world.
Lotus Garden Foods is an illustrative, fictional company that sells packaged snacks for children in a large Asian market. For years its sales grew steadily as household incomes rose.
The finance director studied population data and noticed that the number of children in its main age group was falling by about 2% a year. Without change, sales of $200 million would fall by $4 million a year in volume terms.
The company developed a range of products for older adults and expanded into export markets. Within three years, the new lines made up 15% of revenue. The illustrative lesson is that demographic shifts are slow and predictable, which gives companies time to adapt if they plan early.
Watch out
Common mistakes.
- Treating demographic change as sudden, when it builds slowly over decades and is visible well in advance.
- Assuming all the economic effects were negative, when lower dependency early on supported saving and growth.
- Believing the end of the policy will quickly reverse the trend, when birth rates depend on many social and economic factors.
Questions
People also ask.
When did the policy begin and end?
It began around 1980 and ended in 2015, being replaced by a two-child rule from 2016.
How does it affect pensions?
A smaller working-age population supports a larger number of retirees, which raises the cost per worker and puts pressure on pension funding.
Why does it matter for investors?
It changes the size of the workforce, consumer demand and government spending needs, all of which affect long-term growth and asset values.
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