China should stimulate domestic consumption by boosting birth rate

China must stimulate consumption to offset the potential loss of the US market. To have a lasting impact, stimulus measures must aim to boost the birth rate, given that in societies like China, consumption is driven by raising children. There are costs and benefits to raising children that extend to society as a whole. Faced with an inverted population pyramid, the Chinese government, which has control over so many parameters, is in a unique position to shift the economic value of raising children to their parents. The trade war being waged by the US against China brings to an end the unsustainable dependency of the global economy on US consumption – especially manufacturing- and export-driven East Asia. Since Alan Greenspan took over as head of the US Federal Reserve in 1987, Washington has focused on maximising consumption. If someone is willing to lend money to the United States, it seems that it will simply consume excessively and run a trade deficit. East Asia’s willingness to accept US dollar supremacy has allowed this excess to continue for so long. Without policy intervention, this dynamic could threaten the strength of the US dollar and result in the loss of East Asians’ external savings. The interruption of this dynamic, induced by US President Donald Trump, should be viewed as a blessing in disguise, especially for saving-prone countries in Asia. East Asia’s rapidly declining birth rate is a major factor in its rising demand for external assets funded by trade surpluses. Raising children has traditionally been viewed as an investment in financial support during old age. If too many people choose to have fewer children, a country’s savings could lead to an increase in the value of its currency or to a trade surplus. Couples’ decisions about whether to have children have a wider social impact. In an ageing society with a shrinking workforce, assets in cash, property or equities could decrease in value and ultimately become worthless. A high savings rate is not the best outcome for a rapidly ageing society; the government would be justified in implementing policies to increase the costs for those who choose not to have children. The value of incentives should match the social value of having children. The Chinese government can control multiple factors affecting family planning. It is probably the only government that can easily reverse demographic trends. First, Beijing should tie its mortgage interest rate to the number of children in a homeowning family. The rate should be cut by a quarter for those families with one child, or previous interest payments could be reimbursed when a couple has a child. Amortised loan payments should also be adjusted according to the number of children a family has. Second, in large cities, a substantial portion of the price of a property can be come from land costs and taxes. The government should reimburse these costs based on the number of children in a household. For each child, families could be eligible for a 25 per cent reimbursement. Third, income tax can be tied to the number of children. A child tax credit could amount to half the per capita income in the city of residence. This might encourage one parent to stay at home and take care of the children. China is rapidly becoming a “double income-no kids” society – a statistically dangerous trend. Policymakers should view it as an existential threat and respond with all the fiscal tools at their disposal. Fourth, contributions to the five social welfare funds can be tied to the number of children. For example, the contribution could be cut by 10 per cent for those who have at least one child; payouts should remain the same. All of these initiatives can be self-financing. For example, if the benchmark mortgage interest rate is raised, these policy solutions can also be profitable. While this would increase costs for property buyers with no children, that would be fair since presumably other people’s children would be caring for them, directly or indirectly, in their old age. A declining birth rate is not unique to East Asia. Many developed countries have experienced a similar trend. But the impact on savings behaviour is not the same. The difference in social welfare systems must also be considered. Behavioural differences are extremely important. People in the West, for example, have a more relaxed attitude to saving for retirement than East Asians. They are also more comfortable with carrying debt. In the case of the US, 60 per cent of credit card bills are rolled over monthly, even though the average interest rate is about 20 per cent annually. In China and other parts of East Asia, credit card use isn’t popular. This stark contrast in behaviour leads to the imbalance in savings between the East and West. This imbalance couldn’t have lasted so long without the special status of the US dollar. The dollar assumed gold-like status after the second world war. This has supported the vast demand for dollar-based assets ever since. This story is destined to end badly. When a population is willing to borrow endlessly, they are unlikely to pay back the money. Rather, they pretend to pay it back when they are lent more. The imbalance between the US and East Asia is a Ponzi scheme. Trump is doing everyone a favour by causing its downfall. East Asians must realise that they won’t be able to draw down their savings in the US when they need them. Americans spent them a long time ago. Money in the US cannot be a substitute for having your own children.

China should stimulate domestic consumption by boosting birth rate

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}With the US market largely closed to it, Beijing cannot neglect the wider social impact of couples’ decisions about whether to have children

With the US market largely closed to it, Beijing cannot neglect the wider social impact of couples’ decisions about whether to have children