The decision of the just concluded Fifth Plenum of the 18th Communist Party of China Central Committee to allow all couples to have two children is a historic move aimed at tackling the challenge of the fast aging population that will have a far-reaching impact on Chinese society.
The change in the family planning policy, irrespective of the controversy over its timing, will in the long run boost economic growth. The two-child policy will, first of all, largely neutralize the problems of China's demographic structure. Over the past three decades, the country's demographic dividend, or a population structure with abundant labor force and a small population of aged people and children, had been an important factor that facilitated the economic miracle.
The percentage of China's working-age population started to fall in 2010, while the dependency ratio, or the ratio of non-working-age population to the working-age population, began rising in 2011.
The demographic dividend factor became further compounded because of China's low birth rate of 1.18, much lower than that in many Western and East Asian countries. At present, the natural growth rate of China's population is about 1.4 percent, lower than the population replacement rate. As a result, the supply of labor force has been declining and the proportion of the aging population has been rapidly rising. As such, China would have faced unprecedented pressure of caring for its increasing number of senior citizens by 2050 had the family planning policy not been eased.
Also, in the short term, the two-child policy will significantly boost the development of the service sector, which, in turn, will guide investments to more efficient and profitable areas. Besides, the policy may raise the percentage of newborns, who in the long run will increase the demand for and consumption of housing units by a huge extent.
As the newborns grow up, their families will spend more on food, clothing, education, medical care as well as entertainment, and thus boost domestic consumption, which is what policymakers want.
Moreover, if more couples have two children, they will help maintain a certain percentage of young population. Only with enough young people can Chinese society truly enter a period of innovation, get enough talented individuals and create a market demand big enough to avoid falling into the middle-income trap.
The two-child policy will serve China's short-term and long-term interests both. As China faces the pressure of economic slowdown in the period of "new normal", it has many policy choices. But many of them could hurt China's long-term economic interests.
Therefore, the authorities should draft the details to implement the two-child policy as early as possible. More supportive policies, like providing tax and education incentives for families with two children, are needed so that young couples can be encouraged to have a second child.