China's baby subsidies are tiny but could drive domestic consumption

Mint

a day ago

No longer the world's most populous nation and confronted with projections that its citizenry will dwindle significantly in a couple of generations, China is trying something new. The message is more telling than the substance.
Beijing announced recently that it will subsidize households to have children. Babies born after 1 January this year will receive 3,600 yuan (about $500) annually until age three.
While not a large amount, it represents a further step away from rules imposed in the 1970s that constrained fertility. There's much to be said for starting small and scaling up. It's not hard to see the money being increased—and extended to all children.
The government has travelled a long way since Mao Zedong's death in 1976, when leaders prioritized economic development and poverty elimination. Smaller households were considered a route to higher standards of living, as was the case in South Korea, Singapore and a swag of other Asian success stories. They worked too well and President Xi Jinping's government is trying to address the aftermath.
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The latest shift is a step in the right direction, though not for the reasons you might expect.
Officials should not anticipate a seismic expansion in the number of newborns. Seoul and Tokyo have thrown money at the issue, yet fertility remains subdued. South Korea's rate is the lowest on the planet, though it did climb a bit last year and the number of marriages jumped by 15%. Ideally, nations aspire to a fertility rate of 2.1: the number of children a woman has in her lifetime. That's the level at which society can reproduce itself. Korea's rate is 0.75. China's is likely a touch over 1, according to the United Nations.
The most important aspect of Beijing's new initiative could be what it portends for future steps.
The sums involved, which Bloomberg Economics puts at 0.1% of China's national budget, are hardly extravagant. If applied to all children, they would be worth 3%. And they may even have some impact. Municipal-level subsidies in the central province of Hubei were followed by a 17% jump in births, according to officials in the city of Tianmen. It's all too easy to deride initiatives as too late and probably ineffective. That doesn't mean policymakers should stop trying. (Free pre-school education is gradually being rolled out too.)
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The real gains from subsidies may accrue to those already alive. They may not do a huge amount for China's population, but they provide people with money to spend. Xi and his predecessors have been trying to shift the engine of the economy more toward consumption and away from exports and investment.
The need has become more pressing with a property market slump, while deflation has stalked China for years. Factories are churning out a lot of products for export, but with barriers to the US being pushed up, new buyers anywhere—even in the form of parents receiving these subsidies—will be welcome.
The subsidies 'mark a shift in mindset and potentially lay the groundwork for more fiscal transfers to households," Capital Economics wrote in a note.
That's a more constructive story to tell than one of decline, something that all too often is lumped together with retreating fertility. Taken to an extreme, the latter can lead to calls for drastic action to avert the calamity of depopulation. This is a huge exaggeration. The world's population will peak around 2080 CE and then begin a gentle retreat. It was not too long ago that such an outcome would have been considered ideal.
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When it comes to birth rates, it is always tempting to attach ourselves to a narrative that suits our biases. When China's economy was a seemingly unstoppable force, it was easy to see plentiful and inexpensive labour as a passport to supremacy. Now that Beijing has a few problems of its own, and India's citizenry is larger, it's convenient to throw in small families as a symptom—or cause—of lost ground.
Remember when Japan was globally seen as a rising star? Then a series of bank crises in the late 1990s and early 2000s dented that image. Dismal forecasts of a shrunk population were piled on. Who would make the sushi? Lee Kuan Yew, Singapore's founding prime minister, was an admirer of Japan and its revival after World War II. In his later years, Lee lamented Japan's inability to turn around what he saw as a slow moving demographic disaster. But Japan is cool again and considered a sound investment.
It's in vogue to be bearish on China. Subsidies may not do much for maternity wings, but it's hard to see them as detrimental—even if the ultimate winners left diapers behind years ago. ©Bloomberg
The author is a Bloomberg Opinion columnist covering Asian economies.