How the Two-Child Policy Impacts Chinese Business Families

How the Two-Child Policy Impacts Chinese Business Families
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Two-child Policy in the New Normal: Will Chinese Business Families Change?

When the Communist Party of the People’s Republic of China announced plans to scrap the one-child policy in October 2015, couples around the country began asking, “Shall we have another baby?” As of January 1, 2016, the one-child policy was officially phased out in favor of the two-child policy, meaning that couples can now legally bear two children.

The original one-child policy was introduced in 1979 in order to rein in the surging population, which was said to be consuming too much of the sparse resources allotted to a society that was supremely focused on rapidly growing its economy. Under the policy, urban couples were only allowed to have one child while most rural couples were allowed to have two, only if the first child was a girl.

Fast-forward to today and China is facing a much different reality from that of thirty-five years ago. The Chinese economy has entered a phase that economists call the “new normal”, targeting a slower yet more stable economic growth. Meanwhile, the Chinese population, like its economy, no longer grows at a high rate and now there are worries that the country will become old before it becomes rich. This aging society, which is also struggling to address issues such as gender imbalance, represents a real impediment to China’s long-term sustainable development.

As the fertility rate began falling below the “replacement ratio”, the government fine-tuned its family planning policy years before introducing the new two-child policy – in fact, couples that were both singletons were allowed to have two children since 2013. This allowance was further expanded in 2015 to cover couples where if either of the two were singletons, they could have two children. However, these de facto two-child policies have not had much of an impact on China’s population growth.

With the government now betting the country’s long-term economic growth on an increasing population, the question then becomes, how will Chinese business families change with the two-child policy in place? The one-child policy was introduced in the pre-capitalist market, where “private businesses” didn’t exist, and it dictated family structures, limited successor choices, and forced changes to some traditions like male-only succession. How the two-child policy affects these areas has major implications for the future of Chinese family businesses.

The interesting thing is, high-net-worth business families may consider the two-child policy to be less significant to them. That is because while couples violating the one-child policy would face a variety of punishments, the rich could simply pay a “social maintenance fee”. These fees, which range from 10% to seven times one’s annual income[i], allow the family to obtain a hukou (household registration). One of the most famous cases of the cost of hukous can be seen with filmmaker Zhang Yimou, who faced a staggering fee of 7.49 million yuan for having three children[ii]. As a result, a number of families simply avoid the fee altogether by giving birth to babies overseas in places like the United States or Hong Kong. This is in comparison to smaller business families who have not had access to these options.

As such, the policy’s impact differential between small- and medium-sized family firms and their larger counterparts are expected to be significant. Amongst the top 20 listed mainland family firms[iii], the average number of children the controlling family has is 1.85, which is higher than 1.22 in the sample of over 3,000 privately owned SMEs in a study by Cao and his affiliate scholars[iv].

However, the abolished fee may not be enough to compel great social changes in family planning. The psyche of “one-is-enough” has taken hold even amongst elite business families, a result of the highly pressurized and competitive society for children. The interesting side effect of this psyche is that society as a whole has put less emphasis on the succession of the patriarchal line. Additionally, more women have been pushed to the forefront, and people have been able to experience the merits of women in leadership and are more receptive to having a female leader in business. As a result, even when the first child is a girl, families do not always see a pressing need to have a baby boy as before.

On the other hand, there are some who believe that additional children could be beneficial to Chinese business families.

In the late 1970s, first-generation entrepreneurs benefited from the open-door policy, but they often paid more attention to their businesses and ignored their “little emperors” at home. Many of these children have come to regard the family business as stealing their parents’ love, causing them to develop a resistance to succeeding these ventures. A recent paper published in Science found that these little emperors are “less trusting, less trustworthy, more risk-averse, less competitive, more pessimistic, and less conscientious”[v] than their peers. These observations are alarming especially as families consider the suitability of their singletons as business successors.

Wang Jianlin, property mogul behind Dalian Wanda with a net worth of over $30 billion said that he regretted not having a second child[vi]. People became critical of Wang’s flamboyant son who was known for ostentatious displays of wealth, including photos of his pet dog wearing two brand-new gold Apple Watches. This reflects a common sentiment among the community that having two children would allow a natural companion in one’s childhood and nurture children’s sense of sharing and caring, allowing families to avoid raising a spoiled child. It is a concept of learning through “coopetition”, cooperation and competition combined in a loving and trusting environment.

Additionally, studies have shown that having multiple children increases the likelihood that they will participate in the family business. According to the study by Cao and his affiliates, when a family has multiple children, the likelihood that the first-born male joins the family business rises by 17% and the likelihood of the second child joining the business rises by 21%, which increases to 25% if the second-born is also male. On the contrary, having only one child reduces the chance of intra-family succession by 2.5% and the likelihood of adult children working in the family firms decreases by 14%. The study also shows that human capital constraints imposed by the one-child policy have reduced entrepreneurs’ long-term investment, a critical factor of business longevity.

A number of prominent Chinese business entrepreneurs have voiced support for this phenomenon. Jiang Xipei, Chairman and CEO of Far East Holding Group and strong advocate for relaxing birth controls, is a fifth child among 6 siblings. He believed that “without this pool, the family would not have a thriving business”. To perpetuate this family legacy, he incentivized his two sons to give birth to multiple babies by giving them 10% of the company’s shares for each kid they have, with a cap of 30% for each son[vii].

Similarly, Cheung Yan of Nine Dragons, China’s Paper Queen, encouraged the relaxation of birth control since 2010[viii]. She gave birth to her second son in 1992, some 11 years after her first one, and is currently working out a succession strategy among her sons, who are Columbia and Harvard University graduates.

For entrepreneurs like them, the relaxation of the birth control rules is about how the increasing family pool can fuel transgenerational potential – creating conditions for next generation development and igniting hope for continuity.

Regardless of one’s stance on having multiple children, it is clear that the expanding pool does add to the complexities of family and business dynamics.

In families with multiple children, ownership and management succession becomes tricky as families are exposed to more choices. It is not only about who will get what, but how that decision is communicated. In these cases, clear signaling and planning will help preserve family harmony and legacy across generations.

Additionally, the rising crude divorce rate in China from 0.3% in 1979 to 2.8% in 2015, has shown that the two-child policy can increase the occurrence of children from different marriages. Putting these half-siblings into a single business can invite additional conflicts and family wealth management can become a major challenge.

There are also indications that children in multi-child households may have a reduced sense of filial piety and responsibility towards their parents, crucial elements of Chinese tradition for centuries. Among these children a tendency not to co-reside with their parents can be observed, unlike singletons who generally feel obliged to do so, according to a study on the matter[ix].

For Chinese family businesses, having a second child is now a real, legal option with numerous pros and cons. The second-born should never be treated as a Plan B, taking the spot in the first-born’s stead in case they fail. Rather, families should focus on whether they are psychologically rather than financially prepared for additional children and, more importantly, whether they are ready to take on the challenges that come in these uncharted waters. Ultimately, it will come down to the role of love in the creation of each family’s legacy.

The author would like to thank Blanche Li, Christian Stewart, Dennis Jaffe, Kevin Au and Lenka Beinhoff for their very constructive comments on this article.

[i] UNFPA (2003). The United Nations population fund in China: A catalyst for change. Available at http://www.cath4choice.org/topics/international/documents/2003unfpainchina.pdf

[ii] SCMP (January 18, 2014). China slaps largest one-child policy fine, 7.5 million yuan, against director Zhang Yimou. Available at http://www.scmp.com/news/china/article/1401596/chinaslapslargestonechildpolicyfine75millionyuanagainst

[iii] The list is compiled from the top Chinese family business list (ranked by sales revenue in 2014) released by Forbes China, with companies owned by entrepreneurs being citizens or residents in Hong Kong and Taiwan and those with no clear offspring information taken away.

[iv] Cao, J., Cumming, D., & Wang, X. (2015). One-child policy and family firms in China. Journal of Corporate Finance, 33, 317-329.

[v] Cameron, L., Erkal, N., Gangadharan, L., & Meng, X. (2013). Little emperors: Behavioral impacts of China’s one-child policy. Science, 339, 953-957.

[vi] Source: http://m.huxiu.com/article/12703/1.html

[vii] Source: http://www.cb.com.cn/special/show/949.html

[viii] Source: http://www.paper.com.cn/reviewpaper/artical85.html

[ix] Settles, B.H., Sheng, X., Zang, Y., & Zhao, J. (2013). The one-child policy and its impacts on Chinese families. In K.B. Chan (Ed.), International Handbook of Chinese Families (pp.627-646). New York: Springer.