Last updated: 09:32 / Wednesday, 18 November 2015
Christopher Chu, UBP

China’s Two Child Policy: Investors Should Focus Indirectly

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China’s Two Child Policy: Investors Should Focus Indirectly
  • "The best direct investment strategy for the two-child policy is limited. Instead, we believe investors should focus indirectly"
  • A better thematic for the two-child policy would be healthcare and insurance sectors. Also, the financial sector would be a beneficiary
  • The removal of the single child restriction is an important social advancement but does little to lift productivity in China

China’s Fifth Plenum in October reemphasize the need to support economic growth while also pushing forward measures aimed at increasing the country’s competitive landscape. Among the surprised announcements was Beijing’s decision to loosen its three decade-old single child program and allow all couples to have a second. Children-focused consumer goods, such as milk and paper companies, rallied after the announcement, but have seen gains quickly returned; suggesting that the best direct investment strategy for the two-child policy is limited. “Instead, we believe investors should focus indirectly, and consider investments that reflect the need to loosen the single child restriction instead of the pending result.” Says Christopher Chu, Union Bancaire Privée.

“Though it may sound counter intuitive, a better thematic for the two-child policy would be healthcare and insurance sectors -continues the analyst-. Allowing families to now have two children reflects changing demographic profiles in China, where according to official data, the percentage of those over the age of 60 rises to 39% in 2050, compared with 15% currently. Beijing’s push to increase the nation’s fertility rate is to offset a decreasing labor force and proliferating aging population. As incomes rise, demand for higher quality life moves in tandem. This should lead to a greater ability to spend on healthcare and medical services, where penetration rates are low and only compete with inadequate public coverage and quality.”

UBP thinks the financial sector would also be a beneficiary, as the key towards promoting reform and efficiency would be to further liberalize the renminbi and channel credit to more productive sectors. Before the Plenum, the firm explains, Beijing removed a ceiling on deposit rates, allowing greater competition among the banks while also improving incomes for household savings. If loans were to further channel into less productive sectors, overcapacity issues would ensure China’s vulnerabilities to external price shocks. “These steps to internationalize the renminbi also act as a prelude to the International Monetary Fund’s decision to include the yuan into its Special Drawing Rights consideration.” He adds.

Direct child investments such as baby formula, education, and paper companies are beneficiaries of general population growth and improving household incomes. “But with a current estimate of 20 million births per year in China, this number is still below that of the 1980s when the country experienced an estimated 26 million births annually. With fewer joining the current generation, the median age of 35 in 2010 will rise to 49 in 2050, and also lift the dependency ratio (the ratio of those over the age of 65 by those aged 15 to 64) from a current level of 11 to 42 by 2050."

In the oppinion of UBP, the removal of the single child restriction is an important social advancement but does little to lift productivity in China, which is the economy’s main concern. The caveat to the firm´s analysis is if China’s experience a slight increase in population growth in tandem with waning cultural preference for sons. With sex ratio near 120 boys to 100 girls, this creates another social strain for aging China, and thus, a generation of daughters would be welcomed. Otherwise, China’s population profile will continue to age quickly and not quietly, giving policy makers something to cry about, he concludes.

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