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Will China Erase Birth Limits? Stocks & ETFs to Watch

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Reforms — whether financial or demographic — are pretty rampant in China right now. The ride has been rocky for this economy, with growth dropping to a 26-year low last year and with little respite in sight.  The Chinese economy expanded 1.4% sequentially in Q1, marking the weakest pace of expansion since the first quarter of 2016 and also lagging market expectations of 1.5%.

Naturally, the government is adopting a host of accommodative measures to boost the economy.  Probably, as part of the demographic reform, Beijing is planning to end the four-decade-old infamous policy pertaining to birth limits, as reported on Bloomberg. The reform is expected to take effect by 2019.

China is actually gradually easing its one-child policy in recent times. China had slightly loosened the policy in 2013, relaxing the limit for couples where one partner is an only child. In 2015, China scrapped its one-child policy altogether, allowing couples to have two children.

Why the Move?

Put into effect in 1979, the policy is expected to have put off about 400 million births. However, concerns over China's ageing population and the resultant shortage of workers and consumers prompted this move.

China’s working age population dropped to its lowest level since 2009 last year and also fell below a billion for the first time since 2010. The number of people 65 or older rose to 11.4% of the population, up from 10.8% in 2016.

The State Council last year estimated that about 25% of China’s population will cross 60 by 2030, up from 13% in 2010. As a result, slowing population growth and declining number of workers pose a threat to China’s economic growth and its state-run pension program, per an article published on Reuters.

Investors should note that China has long been working on stepping up domestic consumption, reducing focus on exports and intending to move to a ‘slower and more balanced growth’ economy.

How Effective Will the Move Be?

Now, the scrapping of restriction is expected to translate into huge demographic gains down the road. However, a former division chief at the National Family Planning Commission indicated that "scrapping birth limits will have little effect on the tendency of China’s declining births," as the decision came in late.

Investors should note that the number of births fell 3.5% to 17.23 million in 2017 despite 2015’s loosening of birth limits. Still, we expect some positives out of this move over the long term.

Impact of Likely Baby Boom on Stock Market

As expected, companies selling baby-related goods and services will be the immediate beneficiaries from the end of this policy. Baby-related stocks rallied in China following the news. Of course, companies selling products related to baby care should see a surge over the long run and the Real Estate and Education sectors will also get a lift.

Below we highlight two U.S. stocks pertaining to baby products that can gain from the possible reform of China’s family planning norm.

The Procter & Gamble Company (PG - Free Report)

The Procter & Gamble Company is into Beauty, Hair and Personal Care; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. Baby wipes, diapers, and pants belong to the last segment. Notably, PG derives considerable sales from Greater China and is thus expected to gain significantly from a change in child birth policy. PG has a Zacks Rank #3 (Hold).

Johnson & Johnson (JNJ - Free Report)

The company is a renowned name in baby care products along with other health care offerings. Its huge global exposure makes it a must-watch on China news. This Zacks Rank #3 stock has Momentum Score of A, Value Score of B and Growth Score of A.

A Look at China ETF World

Be it over short or long term, the Chinese economy will likely reap the considerable benefits, putting the spotlight on China ETFs as well (read: 4 Reasons to Bet on China ETFs Now).

China Consumer ETF (CHIQ)

An end to birth limits will translate into higher consumption over the long term, making CHIQ a solid bet. This 40-stock product offers exposure to the consumer sector in China. The product has a Zacks ETF Rank #2 (Buy).

Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS - Free Report)

This product is a combination of China A-shares and smaller capitalization. This ETF attempts to replicate the performance of the CSI 500 index, which tracks 500 small-cap companies on the Shanghai and Shenzhen stock exchanges. The fund currently has a Zacks ETF Rank #3.

KraneShares Zacks New China ETF (KFYP - Free Report)

Since the news revolves around government reform, a look at the ETF related to China's Five Year Plan seems like a decent idea. This fund tracks the Zacks New China Index which offers exposure to companies listed in Mainland China, Hong Kong and the United States whose primary business or businesses are important in the current Five-Year Plan of the central Chinese government (read: Follow These ETFs as China's 19th National Congress Begins).

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