One Child Policy and their Effects on Economic in China

Introduction

            One child policy can literally be referred to as a policy that is aimed at birth planning. It is indeed the one-child limitation within the population control policy that was incorporated with the People’s Republic of China. The government of China has referred to it under the popular official translation of the family planning policy. The policy made an official restriction for the married and specifically urban couples to have only solitary child, while permitting exemptions, for the various cases that include the ethnic minorities, rural couples, as well as parents without any of the siblings themselves (Mara 12). A spokesperson that was elected to for the Committee on One-Child Policy reported that an estimated 35.9 percent of the population of China is presently subjected to the restriction. However, the Special Administrative Regions of Macau and Hong Kong are reported to be completely exempted from the policy. Consequently, the foreigners who live within China are also exempt from the law (Mara 11).

The One-Child policy incorporated within the policies of China in the year 1978 and first applied to the first born children in 1979. This policy was established by the government of China with the aim of alleviating environmental, social, economic problems within China, and the authorities have increasingly made exaggerated claims indicated that the policy has subsequently prevented between 250 and 300 million births since it was implemented until the year 2000, as well as 400 million births from the year 1979 to the year 2011. The policy is reported to be extremely controversial both in China and outside China due to the way the policy has actually been implemented and consequently the economic concerns of the policy (Mara 8). This paper will discuss the effects of the one-child policy on the Chinese economy.

Only-Child-Policy and their Effects on Economic in China

            The one-child policy is reported to be the largest known social experiment in the whole of the human history. Under this particular policy, each of the households was allowed just one child, particularly within the urban areas. The women were provided with the birth quotas, and consequently the household were to be penalized incase they went above the quota births. The policy began in the year 1979 and since then it is reported to have affected an estimated more than a total of one billion individuals in what is seen to have been the most populous nation globally. This particular experiment has provided the researchers with a very unique opportunity of examining the overall impact of the counter-natal policies, which hardly ever occur in the whole of human history (Therese, Li Lu and Zhu 17).

The dramatic policy has unsurprisingly spurred a very vast amount of the research studies, specifically within the field of demography. Astoundingly, there are few studies that have been carried out to measure the overall effect of the one-child policy on the economy. Indeed, within the last two decades, economists, demographers, as well as several other social scientists have investigated the different aspects of the one-child policy ((Therese, Li Lu and Zhu 12). However most of the studies have actually related the actual variation in the fertility and consequently variation in the implementation of the policy across several localities, finding that the implementation variables that include one-child subsidies, fines for the above quota births, as well as provision of the contraceptives (Therese, Li Lu and Zhu 19).

          The novel intent that led to the implementation of the one-child policy was the economic aspect, maintenance of a very stable labor rate, reduction of the demand of the natural resources, reducing the unemployment rate that is caused from the surplus labor, as well as reducing the exploitation rate. The main justification for the policy was actually based on their reported support of Mao Zedong purportedly Marxist theory of the population growth; however Marx was witheringly critical of the Malthusianism. Since the policy was actually introduced within the Chinese government, it is reported that the saving rate of individuals in China increased tremendously. The increased interest rate has been partially attributed to the actual policy in two different aspects. First, on average it is reported that the Chinese household are actually expending fewer resources both on the perspective of money and time on the children which consequently gives the Chinese individuals more money that they can invest. Secondly, since the young Chinese individuals are no longer capable of relying on the children to take care of them during old age, there is a drive to save enough money for the future (Therese, Li Lu and Zhu 16).

It is reported that Russia, China, Brazil, and India have actually contributed to approximately half of the world economic growth within the past decade, however the high time is reported to have been over due to the aging population. No wonder China was hit hard by the global financial crisis. The key effects in the demographics are actually being witnessed within China where the one-child policy is reported to be holding the economy back from the strong and young labor force. This has consequently raised increased doubts on the way the increasing pension bill would be funded. It is indicated that Catherine Liu who owns Shanghai Worldwide Trading Co. that has approximately five factories within Shanghai; within a year fired an estimated two thirds of all the low paid labor force and consequently who was getting old and therefore driving up expenses. Maurits Elen stated as quoted in Weiguo that,

Local workers are getting much older. If you want to train them, they must be young. It’s very difficult to survive. Young inland workers are not like their parents. They want easier jobs in supermarkets or restaurants. And the surplus of farmers older than 40 don’t want to work in factories or would need months of expensive training (Weiguo 19).

Goldman Sachs indicated that the growth that is being witnessed within China has the ability of slowing down the economy since there are fewer and fewer young individuals keeping the various factories thriving, while subsequently on the other hand there are several pensioners that could support the individuals within the market. Nicholas Eberstadt who was a demographer for the American Enterprise Institute situated in Washington stated that, “Financial markets, businesses and policy makers have failed to recognize that demographic realities are creating pressures for slower future growth” (Weiguo 27).

Indeed, the low and diminishing reduction of the young and energetic labor force made the Chinese government to be highly affected by the global financial crunchdown that hit several countries around the world. The different causes and consequences of the credit crunch that affected the entire world was extensively reported by international media and reflected on as a crisis more than any other global economic event. The background at the time had not been understood but at the moment, it has been widely perceived. It is somehow possible to analyze and get to know the exact cause of this global financial crisis by stating that the demand to buy into real estate brought about a monetary lending practice that was somewhat vulnerable to the market cycle of the same property market (Brown and Davis 20). This in turn led to a sequence of complications in terms of issues in the general global market platform with the different economies collapsing, especially in the banking sector and corporate entities. Most of this took place due to reduced, low or limited liquidity and intensive pressures as a result of the recession experienced. It has over time become crucial to undertake valuations in new markets and the impact they have in economics (Brown and Davis 23).

A look at the past reveals that you could get appreciation of the connection between making profit and making a loss in other types of investments. This is inclusive of government bonds, foreign currency, stock markets or trading in expensive goods like gold. The fact is that all these types of investments have been adversely affected by the credit crisis with many of them facing a steady and in some cases, a dramatic decline (Stevens 35). The financial or the economic crisis is widely accepted to have begun sometime in the year 2007 around July with the common factor being the credit crunch in the United States that was caused the investors especially those in the value of mortgages triggered a critical liquidity loss. The effects of this reached their peak in 2008 around September when stock markets around the world came down and became critically volatile (Stevens 37).

            Of the increased developed economies globally, China is reported to have emerged as one of the least affected countries by the Global Financial Crisis (CFC). The financial report of Australia indicates that on the March quarter of the year 1999 growth domestic product growth (GDP) of 0.4 percent. This is a clear indication that China had almost escaped the global financial crisis. Indeed, the banking sectors of China is reported to have been less affected as compared to other countries globally, with profitability being indicated in most financial statements of the banks and consequently minimal failures (Davis 21). However, the profitability was down as compared to the other years with increased cases of bad debt. Moreover, the confidence of many consumers dropped as everyone adjusted their budgets downward in fear and negative anticipation of what was coming (Davis 21).

There has been an increasing case of the failures of the listed investment or financial companies as well as large investor losses accruing from the investment funds and investment funds, prompting increased concerns regarding the financial market practices and the investor protection. The approach of the China government regarding the regulation of the investment markets and securities, on the basis of disclosure, advice and education, did not actually prevent the marketing of the high risk financial products. Furthermore, it is indicated that by June 2009, the stock market of China had reduced by approximately 41 percent from the initial high in the year 2007; this created a very significant loss to the many investors and the pension fund sector subsequently prompting increased concerns regarding the adequacy of the regulatory structure of the securities market (Horne 13).

A critical look at the global financial structure of the China’s financial system indicates that Australia indeed had a very significant exposure to the financial crisis that was experienced globally. It is reported that China was ranked second just after the United States in the perspective of the issuance of the asset backed securities. Further, the Chinese sector concerned with the management of funds is reported to have been the fourth largest globally with approximately $1.2 trillion of the funds under the management (D’Aloisio 9). In addition, China is reported to have had a very large hedge financial sector without any particular special regulation on the hedge of the funds. Furthermore, while it is true that the domestic corporate bond as well as the commercial paper markets is actually small, the large companies in China have increasingly been active users of the global bond markets. The banking sector in China is reported to have been highly concentrated with the largest banks having a market share of an estimated 65 percent of the assets of the Chinese residents. Nonetheless, approximately 40 to 50 percent of the assets were funded by the domestic deposits but instead relying very heavily on the offshore wholesale funding. Finally, the price of housing is also reported to have doubled since 1990s with the affordability of the hoses becoming low since late 1980s (D’Aloisio 11).

In the past few years, several scholars have indicated that the economy had actually de-coupled from Europe and the United States, and would consequently continue being powered by the increasing growth of China as well as several other developing nations. The inflation concerns indicated that the interest rates were actually increasing and several individuals felt that Australia was likely to escape the global economic crisis within the developing world. However, the events have in the contrary unfolded differently (Gruen 32). The Chinese Government took a very unusual step of guaranteeing the deposits that were held in the banks within China. The credit unions, building societies, as well as the Reserve Bank of China delivered a 1 percent cut on the interest rates indicating that there was a heightened instability within the financial markets and consequently the diminishing prospects for the global markets. This was a very extraordinary turnaround. This is the reason why China became increasingly ensnared in the popular global financial crisis that started in the mid 2007 and is reported to have intensified since that period. However, the main question that scholars have been interested in is how and why the Chinese government got specifically caught up in the financial mess that began with the decrease in the property prices within the U.S (Gruen 13).

The global financial crisis unfolded in different stages. The first stage was the bursting in the U.S. of the housing sector. This consequently led to the prices of the various securities of the mortgage backed plunging, which in the long run led to the collapse of the security prices. As a result of the hedge fund liquidation stage, the focal point at this point was the banking sector. The banking sector was very slow in admitting the actual extent of their exposure to the securities that were mortgage backed as well as the related derivatives, which subsequently resulted to the breakdown of the trust within the markets (Kearns 42).

The banks are reported to have become extremely very reluctant in lending one another and irrespective of the repeated efforts initiated by the central banks in injecting very large amount of money into the banking system; this resulted into a liquidity crisis. This particular phase has been very severe and longer than expected and consequently resulted in the sweeping changes within the banking sector of the U.S. through collapses and mergers (Mule 24). While it is true that the U.S. has been at the epicenter of the global financial crisis, each of the stages of the crisis has been subsequently echoed within Australia. It is reported that in the year 2005 before the peak of the global financial crisis, the Economist made a publication that contained what has been referred to as prophetic words stating that,

Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock-market bubble burst in 2000. What if the housing boom now turns to bust? (Mule, para. 7). The frothy prices of the property are reported to have been fuelled by the combination of the low interest rates, increasing consumer appetite for the extensive use of the securitization and debt, loosening of the lending standards, and this is reported to have allowed the buyers of the homes access to capital globally. It is approximated that from the year 2004 to the year 2006, over 20 percent of the mortgages in the U.S. were actually taken out by the sub-prime borrowers who had very poor credit histories as well as limited capacity of servicing their various loans (Mule, para. 3). The borrowers are reported to have instead relied so much on the rising prices of property making them capable of selling for a profit or simply financing their various mortgages at an extremely lower rate after the accumulation of more equity. However, when the prices started falling, the borrowers are reported to have fallen behind in their various payments and consequently walking away from the various debts that were now larger than the actual diminished value of the particular homes (Mule, para. 9).

The global financial crisis was not in any way different within China. The prices of the property is reported to have risen in a rate that is similar to that which occurred in the U.S as illustrated in figure 1 bellow. Moreover, since the year 2002 to the year 2003 the household saving of China has been increasingly negative. Indeed, the borrowers have been faced by a repeated rise in the interest rates on the growing debt (Mule, para. 6). Moreover, the sub prime market of China has been smaller than that of the U.S. at an approximately 2 percent of the mortgages. Nevertheless, while the U.S. has an important excess supply of the housing, China on the other hand still faces an increased shortage of the housing. Consequently, despite the rising delinquency rates, China is yet to fully escape the vicious bursting that exists within the housing bubble. Nonetheless, several scholars have increasingly argued that the significant risks are remaining for the prices of property in China (Mule, para. 8).

In the context of the second stage of the global financial crisis, China is reported to have been very unlucky. Several investors held different securities with the direct exposure to the particular ailing mortgage backed market of the U.S. submarine. There were two prominent casualties that are reported to have been high yield funds that were managed by the Absolute Capital and Basis Capital.  The mortgages that were backed by the securities that were packaged in the particular form of the collatorised debt obligations (CDOs) had been widely distributed to the middle market Chinese investors that include universities, local councils, hospitals and schools (Mule, para. 2).

The non banking mortgage lender, RAMS is also reported to have found itself in a big trouble. RAMS is reported to have relied heavily on the short term financial support, much of the funding was sourced from U.S. investors who are reported to have lost interest in the purchase of the commercial paper that was asset backed irrespective of whether the actual mortgages were actually in China or elsewhere (Mule, para. 13). Being unable to actually fund its actual self, RAMS is reported to have been the very first corporate victim in China to have been adversely affected by the global financial crisis. Consequently, several other non banking mortgage lenders became under increased pressure as the global securitization markets shut down effectively. However, one of the brightest spots was that unlike the U.S. and European banks, the banks in China had very minimal direct exposure to the sub prime mortgage backed securities as well as their particular derivatives on their particular balance sheets (Mule, para. 11).

As the whole crisis shifted to the liquidity stage, its impact on Australia is reported to have intensified. The various institutions that heavily relied on the financing especially from the offshore found it extremely expensive to actually refinance their maturing debts. Among the various companies that are reported to have been caught in financial crisis included MFS, Centro, Allco and ABC Learning. Moreover, the biggest institutional borrowers within China are the banks (D’Aloisio 17). However, they came to actually rely heavily on the offshore markers so as to provide funding for the growing borrowing habits in China. By the end of the year 2007, the net foreign debt of Australia exceeded $500 billion, corresponding to over 50 percent of the annual GDP of the country. Nonetheless, despite the clean balance sheet of the Chinese banks, they were forced to pay a very high margin on their financial borrowings that was demanded by the investors from the U.S. and European banks (D’Aloisio 18).

Moreover, even the Chinese money markets were also affected and this consequently pushed the interest rates that were to be paid by the banks for the short dated borrowings. Just like the central banks globally, the Chinese reserve bank also responded immediately to the liquidity crisis through the injection of the additional cash into the system (Mule, para. 6). As part of the effort, in the year 2007 it expanded significantly the collateral range it would accept from the banks in the exchange for the funds, and even doing far as allowing mortgage backed securities, notwithstanding the highly rated ones. Despite the local and global turmoil, the Reserve Bank is reported to have remained increasingly concerned with the inflation raising their rates up to four times during the period of the credit crisis. Nonetheless, in an effort at recouping the soaring costs of funding, the banks are reported to have broken with the tradition and consequently raised the mortgages rates over the moves of the Reserve Bank (Mule, para. 12).

Figure 2 illustrates the Growth in Chinese Foreign Debt

Source (Mule, 2005)

The increase in the funding margins for the international and Chinese banks led to an increasingly widening of the credit spreads particularly on the outside of the financial sector. The spread widening took a serious toll on the individual performance of the Australian fixed income funds which initially invested on the corporate bonds as a means of enhancing their portfolio yields. Moreover, the stock market is also reported to have increasingly suffered (Stevens 9). In a nutshell, the global financial crisis almost had a serious impact on the whole of the economy of Australia, but currently the situation has been increasingly improving and there is no likelihood of financial crisis occurring of the same magnitude as the one that was witnessed. In a nutshell, it is significant to note that the Chinese government was increasingly affected due to the one-child policy that has ensured that the young and energetic individuals who are capable of providing the workforce that could propel the economy are limited.

Conclusion

            This paper has discussed the effects of the one-child policy on the Chinese economy. The one-child policy has adversely affected the economy of china since it has limited the number of young and energetic individuals within the labor force. This consequently led to the diverse effects that were realized during the global financial crisis.

Works Cited:

Brown, Cally and Kat Davis. “The Sub-Prime Crisis Down Under.” Journal of Applied Finance (2008 Spring/Summer): 16-28.

D’Aloisio, Tania. “Regulatory issues arising from the financial crisis for ASIC and for market participants,” 2009. Accessed on June 10, 2012<http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/sdia-speech-chairman-May-09.pdf/$file/sdia-speech-chairman-May-09.pdf>

Davis, Kat. “Infrastructure Trust Financial Management.” JASSA: The Finsia Journal of Applied Finance, (2009 March): 43-47.

Gruen, David. “Reflections on the Global Financial Crisis,” 2009. Accessed on June 10, 2012<http://www.treasury.gov.au/documents/1574/PDF/05_Reflections_on_the_Global Financial Crisis. PDF>

Horne, Derrick. The Lucky Country: China in the Sixties. Melbourne: Penguin Books, 1964.

Kearns, Jane. “The Chinese Money Market in a Global Crisis.” Reserve Bank of China Bulletin, (2009 June): 15-25. Accessed on June 10, 2012<http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jun09/Pdf/bu-0609-2.pdf>

Mara, Hvistendahl. “Has China Outgrown The One-Child Policy?” Science, 329. 5998(2010September): 1458–1461.

Mule, Sussex. China and the Global Financial Crisis, 2005. Accessed on June 10, 2012<http://www.stubbornmule.net/2008/10/australia-and-the-gfc/>

Stevens, Gerick. “Australia and Canada – Comparing Notes on Recent Experience.” Reserve Bank of Australia Bulletin, (2009 June): 36-44. Accessed on June 10, 2012<http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jun09/Pdf/bu-0609-4.pdf>

Therese Hasketh, Li Lu, and Zhu Wei Xing. “The effects of China’s One-Child Family Policy after 25 Years.” New England Journal of Medicine, 353.11(2005 Sept 15): 1171–1176.

Weiguo, Zhang. “Child Adoption in Contemporary Rural China.” Journal of Family Issues, 27(2006 March): 306.

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