The Economic Account of Fertility Subsidies Promoting Consumption

After the "two new" policies, can this year's fertility subsidies become another "positive feedback" to boost consumption? Although recent news about fertility subsidies has been overwhelming, there are still two major doubts that remain unresolved: first, can the case of Hohhot in Inner Mongolia be replicated nationwide? Second, for China, how much strength in fertility subsidies is needed to be effective? We believe that the current most "immediate" solution to improve the birth rate is to concentrate the distribution of fertility subsidies in lower-tier cities, ensuring that the subsidy for a family exceeds 15% of the local per capita GDP.

How much strength in fertility subsidies is needed to be effective? This question may yield different answers between regions with varying levels of socio-economic development. We attempt to categorize them into two groups: economically developed and underdeveloped regions for discussion:

Underdeveloped regions: The suggested subsidy for a family should exceed 15% of the local per capita GDP. Based on previous cases in lower-tier cities such as Panzhihua and Karamay, providing a fertility subsidy of around 15% of the local per capita GDP for a family can promote an increase in the local birth population; of course, this is merely the level that "just might" improve the fertility situation.

It is worth noting that for lower-tier cities, the importance of supporting mechanisms such as parental leave and childcare centers is relatively low; "direct cash payments" are sufficient (refer to Panzhihua, Sichuan). Therefore, the recent "direct cash payment" approach in Hohhot, with a maximum subsidy for a family reaching 94% of the local per capita GDP, is expected to lead to an "immediate" improvement in the local birth rate.

Developed regions: The subsidy strength should be greater, and supporting mechanisms cannot be neglected. In fact, there are early cases of fertility subsidies being issued in first-tier cities, such as Shenzhen, which has been discussed recently. As early as 2023, there was a related experience, but the local birth population did not show improvement. The reasons are twofold: on one hand, the maximum subsidy for a family at that time was 9.7% of the per capita GDP, which is far from sufficient for first-tier cities with high living costs; on the other hand, encouraging childbirth lacked the "support" of other accompanying mechanisms.

Considering that there are few cases of promoting childbirth in developed regions of our country, we might draw lessons from neighboring countries. In terms of subsidy forms, referring to the latest situation in South Korea, the subsidy for one child is about 20% of the per capita GDP (regardless of the number of births), and there are supporting mechanisms such as parental leave and daycare services, which may help improve the birth rate. In comparison to domestic first-tier cities, 20% of the per capita GDP corresponds to a subsidy of at least 40,000 yuan for each child. From the perspective of policy advancement, looking at Singapore and South Korea, encouraging childbirth policies in developed regions will not yield "immediate results"; what is important is how to continuously "improve" policies and change residents' perceptions of childbirth The "arrow is on the string" fertility subsidy is expected to be officially implemented in the second quarter. Referring to last year's "Stimulating Consumption 1.0" policy, there was about a 7-month gap between the policy direction guidance and the full implementation of the policy. According to the timeline, this time, as part of "Stimulating Consumption 2.0," the fertility subsidy is expected to be concentrated and released at the local level in the second quarter—as early as last October, the State Council proposed to "accelerate the improvement of the fertility support policy system." With the Two Sessions further strengthening policy guidance and proposing "issuing childcare subsidies," the National Development and Reform Commission began to "actively expedite formulation." Led by Hohhot, the next phase will be the "peak period" for local issuance of fertility subsidies.

The policy effect of the concentrated fertility subsidy in the "middle ground" in the second quarter is expected to be the best. For regions with a high fiscal self-sufficiency rate and strong economic strength, the time and monetary costs for the policy to take effect are higher, and the "cost-effectiveness" of attracting external labor through the "population siphon effect" is greater; for regions with a low fiscal self-sufficiency rate, the pressure to continue implementing childcare subsidy policies is significant. Therefore, it is expected that areas with low birth rates and moderate fiscal self-sufficiency rates will become the core areas for the upcoming issuance of fertility subsidies, and Inner Mongolia happens to be in this "zone."

Risk Warning: Information statistics are incomplete; future policies may fall short of expectations; changes in the domestic economic situation may exceed expectations.

Authors: Zhong Yumei, Tao Chuan, Source: Chuan Yue Global Macro, Original Title: "The Economic Account of Fertility Subsidies Promoting Consumption (Minsheng Macro Tao Chuan Team)"

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