China scraps one-child policy

China has scrapped its one-child policy more than three decades after it was first introduced. After the abolition, each couple will be allowed to have two children. Prior to that, only selected couples are allowed to have more than one child, e.g., families can have two children if one parent is an only child. 

The move has two key effects. First is to counter population aging. The working-age population has already peaked in 2012, and labor shortages in labor intensive industries are not uncommon. Policy relaxation would slow down the decline in labor productivity caused by an aging workforce. The caveat is that it takes at least 15 years before babies born can enter into the labor force in the future. That means yesterday's policy relaxation would only make a clear positive impact on the young workforce by around 2030. 

The second is to spur private consumption. While rising wages alongside healthcare and pension system reforms could help raise private consumption per-head, relaxing the one-child policy would lead to an increase in the number of consumers in the long term. More near-term impact on consumption should be seen relatively quickly as parents spend money on their babies and children. As China's new growth model is premised on domestic demand, relaxing the one-child policy is but an inevitable step.