How to profit from the end of China’s one-child policy

In economic terms, China has come a long way since Mao. It's hardly a free market, even today, but it's moving in the right direction and will go even further if reform continues.

But at the same time, there has been very little political and social reform. The Communist Party calls the shots, and the media is strictly controlled and censored.

Yet, perhaps change is starting to creep in on this front too. The most visible manifestation of this repressive society the one-child policy is finally being scrapped altogether. All couples (not just certain groups) are now to be allowed to have two children.

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Let's not get carried away here. This change isn't taking place for moral reasons, or because Beijing suddenly cares about freedom. The basic problem is a demographic one low birth rates already mean that China will have a tough time in the future supporting its elderly population with a declining number of young workers.

That will take time to reverse. But there may be more immediate opportunities for smart investors as part of the process.

Why was there ever a one-child policy anyway?

However, rather than acknowledge the real problem and free people up to solve it, Beijing did what central planners do. It decided to impose rules to control the size of the population. Hence the one-child policy.

There were a few exemptions, such as couples who were both only-children. And the laws were a little less strict in rural areas (partly because of the difficulty of enforcing them).

Yet punishments for those who broke the rules could be brutal, ranging from fines and jail to forced terminations. The policy also encouraged families to abandon or simply kill female babies.

As a result, the total fertility rate (the average number of babies per woman) has fallen from just under three in 1979, to around 1.5 since the late 1990s (it was 1.66 in 2012). This is below the 2.1 replacement rate' needed to keep the population stable.

This has created several problems. Firstly, the Chinese population is due to peak in the next few years at just under 1.4 billion, which will hit economic growth. At the same time, the number of over-65s is due to rise sharply, reaching 300 million by 2050. This will put a burden on public services. Indeed, the problem of one child supporting two parents and four grandparents already has a nickname "4-2-1".

This may have been sustainable when the country was growing at a rapid rate. But it's clearly going to be a big problem now that growth is slowing. And a stagnant, ageing population, impoverished in old age, is also unlikely to buy many goods a big barrier to China's hope of a more consumer-focused economy.

The economic pressures have grown so significant that they have finally forced Beijing to make a move. Last year, China relaxed the rules further to allow families where one parent was an only child (rather than both) to have two. Now, the Chinese government is scrapping the one-child policy completely, so that all families can have up to two children.

The bad news is that, for now, two children will be the upper limit. Those who want three or more will still face the full wrath of China's population-control police. So people's right to have children is still being restricted.

However, experts hope that in the medium term, the need to balance the ageing population means that all barriers will be scrapped. Indeed, there are some hints that China may eventually start encouraging people to have kids, as some officials are calling for.

Overall, Credit Suisse thinks that even in a small increase in the birth rate could boost the number of births by up to six million each year, starting in 2017. For comparison, there are 3.9 million births a year in the US and 5.1 million in the EU.

This isn't just China's problem

Many countries are now trying to encourage people to have more children. Tokyo is encouraging local authorities to run speed-dating sessions. And the government in Singapore runs a matchmaking service.

But it's not just weird public-sector dating services. It also includes more concrete measures, such as housing subsidies, longer family leave and daycare subsides. Asian countries also increasingly offer direct cash payments, with even some large companies following suit.

These seem to be having some effect, with the number of births starting to gradually increase.

The companies to buy

However, there are still some decent buys available. Procter & Gamble (NYSE: PG) gets a large chunk of its revenue through the sale of Pampers nappies. While nappy sales have been stagnant in the US, they are growing fast in China.

This summer P&G began a big push to enter the Chinese market by rolling out a premium range of Japanese-made nappies. Meanwhile, demand for imported toiletries has been growing in China due to recent scandals around poor quality in domestic products. Given a half-decent dividend yield of 3.5%, P&G looks a good long-term bet to me.