An Expanding Chinese Market

Well, it’s official. China has officially voted to adjust its One-Child Policy, ending a 35-year restriction on childbearing. While the social ramifications of this decision are monumental, I’m interested in examining the impact that permissibly higher birth rates will have on the venture landscape.

To begin, it is important to note that the One-Child Policy was not set in stone. Previously, a myriad of financial and social loopholes could be leveraged to birth additional children, which meant that many families were able to avoid the policy altogether. With that being said, it was generally the rich that were able to afford the heavy fines associated with a second or third child, keeping China’s poor, rural population in check.

This reality, in combination with steady migration to urban centers, led to a growing size disparity between the rural and urban populations. As a result, startups addressing the Chinese market would focus on urban population centers, where both financial and human capital was more readily available. But with the One-Child Policy being changed to the Two-Child Policy in 2016, there may be huge demographic shifts that affect the Chinese market.

It is expected that 100 million families will now be able to have a second child, and based on the aforementioned financial trends, it would seem likely that many of these children will be born into rural communities. Farming has two limiting factors, land and labor, but with additional children, farming communities may be able to increase their overall production. At the same time, one must consider the growing market size of consumers; China will have to produce goods (both food and technology) to adequately satisfy domestic and international demand. As such, there seems to be a unique market opportunity here for startup companies, whether they’re addressing the urban or the rural populations of China.

Through the urban lens, it can be expected that many of the children born into rural communities will eventually make their way to cities. The Chinese government has been encouraging the migration of rural citizens for years, and with such a massive boost to the rural population, many of these children will have to pursue job opportunities at factories that reside in urban centers. But urban centers only offer so much opportunity, so it will be important for emerging companies to address the growing needs (food, housing, and transportation) of these next-generation workers. If I was to place a bet, it would be that the sharing economy will see its biggest growth in China over the next 25 years, as a swelling population demands collective resources.

At the same time, it is clear that the growing rural population will also offer a compelling market opportunity. These rural communities are largely uneducated, and initiatives (or businesses) that educate these communities may find success. Granted, the focus of education will likely be different in these areas. To farmers, understanding calculus is not nearly as important as understanding nitrogen fertilizer application. But either way, this market will be important in the years to come.

Yet the rural market is not only appealing to emerging businesses. Traditional players like Facebook, Google, and Microsoft may attack this market as it continues to grow. Clearly, infrastructural changes (expanded wi-fi / LTE / mesh networks) will be needed for these tech giants to take on such isolated areas of China. But as the infrastructure starts to evolve, one of the only limiting factors left is cost. Assuming the cost of smartphones / computers / tablets continues to fall, I have no doubt that we will start to see the adoption of 21st century technology in rural China.

Finally, it is important to consider whether or not the Chinese will take advantage of the new Two-Child Policy, considering the cultural norms that have solidified in the last ~4 decades. All of my insights have been built on the assumption that the Chinese will choose to birth more children, but this may not necessarily be the case. There are obviously costs that come with more children, and some rural families may not be able to afford these costs. Additionally, it has become “normal” for the Chinese to only have one child, so families may refrain from having multiple children. Therefore, it will be interesting to see how the Chinese respond to easing government restrictions, as their response will undoubtedly affect the production and consumption of goods in the years to come.

All in all, it seems likely that ending the One-Child Policy will impact the Chinese economy in some way or another, but to what extent the markets will be effected is still unknown. Either way, I would argue that the sharing economy, educational reforms, and increased access to technology will complement the growing Chinese population, providing opportunity to both established and emerging companies. It will be exciting to track these developments as they emerge in the years to come…

Happy New Year’s Eve, everyone!

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