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What's behind China's one-child change? An aging workforce

Today's boomers, tomorrow's pensioners. China's leaders approved sweeping social and economic reforms, including a relaxation of its one-child policy.
Today's boomers, tomorrow's pensioners. China's leaders approved sweeping social and economic reforms, including a relaxation of its one-child policy.Feng Li / Getty Images

It's the economy, stupid.

China's announcement that it would relax its long-standing policy of allowing couples to have only one child is likely to give China's slowing growth rate a boost. 

The reason, according to Citigroup analysts, is that China's population (like the rest of Asia) is aging, and that could become a problem for pensions.

In China 8.5 percent of the population is currently over 65, and this is set to rise to 23.9 percent by 2050, according to United Nations data.

"China has reached a turning point where the demographic dividend will become a liability," said Shuang Ding, China economist at Citi.

Chinese state media reported Friday that the government would allow couples to have two children if one of the parents is an only child. The change was intended to promote "long-term balanced development of the population in China," according to the state-run Xinhua news agency. 

Under the current law, couples living in Chinese cities can only have two children if neither have any brothers or sisters. 

China's one child policy has meant the total fertility rate - the average number of children that a woman would give birth to over her lifetime - has declined from 3.0 during 1975 to 1980 to around 1.6 during 2005 to 2010, the Citi note said. The note was released in October in anticipation of the changes approved by China's rulers at its Third Plenary Session earlier this week.

"The resulting decline in the dependency ratio [the ratio of the working-age population to the dependent part of the population not in the labor force] has contributed significantly to China's amazing growth performance. However, working age population appears to have peaked...Population aging would reduce China's growth potential and put pressure on the pension system," added Ding.

China's economy has slowed in recent years as the government transitions from an investment led model to one based more on consumption.

Gross domestic product (GDP) rose 7.8 percent in the third quarter, up from 7.5 percent in the previous three months, but the pace has been lower than the double-digit growth rates it enjoyed in the past.

Citi foresees two possible scenarios for the economy, which could occur if families are allowed to have more children, based on a likely and an aggressive scenario.

In the more likely scenario, the total fertility rate will rise from its current level of 1.6 to 1.8, and would lead to 11 million additional births in the next five years. In the more aggressive scenario, the total fertility rate would to rise to 2, yielding 16 million births over the same period.

In the near-term, the consequential rise in the population from Citi's more likely scenario would add 0.1-0.2 percentage point to annual growth, while the aggressive scenario would add 0.2-0.3 percent point to annual growth.

And after 2030, when the baby boomers enter the labor force, annual growth could be lifted by 0.05 percentage point per year in the more likely scenario and 0.15 percentage point per year in the more aggressive scenario.

China also announced significant economic reforms, including a proposed change to the country's tightly-controlled banking sector, allowing the establishment of small and medium-sized private banks.

China's ruling party agreed the roadmap at the Third Plenum of its 18th Central Committee earlier this week. This secretive four-day meeting was the first opportunity the year-old administration led by Xi Jinping has had to set its policy agenda.

The Third Plenary Session of each new central committee has added historical significance as it was the meeting in which Deng Xiaoping adopted the open-door policy in 1978, and China entered the World Trade Organization (WTO) in 1993.

Following the announcement, a senior U.S. Treasury official told Reuters that China’s leaders had shown that they were committed to market-based reforms, but that they faced a test in trying to deliver results.

"I think there is going to continue to be progress, but the question is how much and how quickly," said the official.

"The direction is significant, but the character and the pace of change matters."

Chinese leaders are under pressure to replace a growth model based on exports and investment that delivered three decades of rapid growth but has run out of steam. Reform advocates say Beijing must curb the privileges and dominant role of state companies they say are inefficient and a drag on growth.

In Friday's report, the ruling party pledged to ease barriers to private competitors in markets controlled by state companies, though they reaffirmed that government-owned industry is the core of the economy.

"We must promote orderly opening to the outside," the report said.

NBC's Patrick Rizzo, Alexander Smith and Li Le contributed to this report. Reuters also contributed.