On the day the Chinese government announced that families would be able to have 3 children instead of two, many childcare/fertility related stocks jumped in hopes of a higher birthrate. If only it were that easy. The hangover of many years of one-child policies linger in the ultra competitiveness of Chinese parenting, leading to a social malaise known as involution.
What is involution? Involution is the rat race of meritocracy, where students are enrolled in after school tutoring as early as age 3, where young workers work 9-9-6 (9 AM to 9 PM, 6 days a week), where the young and moneyed wear logos splashed across everything from sneakers to sunglasses, where adults scrimp and save and pool money from parents and grandparents to buy a property near a good school, where moms compete to shuttle their kids to as many classes as possible (rinse and repeat). In China, success is singular: security, expressed through money, or a government job. And due to thousands of years of meritocratic history, the path to success is also singular: good grades. So the archetypical Chinese saver would only open their wallets for two things, which they perceived as guaranteed investments: property, and their children’s education. Everyone knows it is endless, pointless, and it creates pressure on them and everyone else. But they can’t stop. It is the glue of the Chinese dream, and it is coming apart.
Some young people, mostly the better off ones, are just choosing to drop out. “Tang ping,” they call it, to lie flat, to give up and just enjoy life. Like the “Turn On, Tune In, and Drop Out” generation of the 60s, these youngsters are choosing to live for the here-and-now. Luckily for the Chinese economy, it is more hedonism than nihilism, expressed through an indulgence in online entertainment and lifestyle consumption rather than drugs and sex. We are rather skeptical on overall consumption due to the burden of property investment, but we are bullish on Bilibili, which focuses on Gen Z, a demographic with a higher willingness and ability to spend than an older or more rural population. But what is particularly dangerous is the lack of willingness to get married or have more children, because of the emotional and financial exhaustion of even a single child. Over the past decade, China’s population growth increased at an average annual rate of 0.53%, the slowest rate since 1953. China’s marriage rate dropped for a sixth year to 6.6 per 1,000 people, the lowest level in 14 years. Marriage, for some, is now perceived as an entry ticket into the involution death spiral and guaranteed loss of freedom and quality of life. The biggest challenge to China’s economy is not whether they will get rich; but how fast and how much they will age before they get rich.
But, if they can’t stop on their own, the government will make them stop. Recent regulations have heavily targeted the education sector, a mainstay of China portfolios around the world. China has introduced bans on online courses for kids under 6 years old, restrictions on homework and mandatory licensing for all teachers. They are suggesting the possibility of banning weekend and holiday classes. Property taxes are being trialed in Shanghai and Chongqing, and healthcare costs are being forced down with the two invoice system. Unlike the West, where property, healthcare, and educational costs continue to inflate, the Chinese government is applying deflationary pressure on all the costs that are holding back the birthrate (I recently wrote another article about healthcare deflation for this publication).
But where there is oppression, there is creativity. A property agent in Shenzhen invented a new way to list 2nd-hand property prices as local regulations only allow reference prices which are much lower than real prices. One durian equals RMB10mn and one banana equals RMB1mn. One seller agrees to sell at the reference price but requests a purchase of his “Eight Chicken” drawing at RMB3mn to complete the sale. Private tutors are cooperating with public schools to use the school’s classroom after school, qualifying as part of the school curriculum rather than after-school tutoring.
In reality, the only long-term solution is a cultural change. In the West, money is just one option, and often perceived as vulgar on its own. The pursuit of passion, taste, freedom, scholarship and impact are equally or even more respectable. Students are evaluated holistically in the admissions process and not merely on examination scores alone. Children are encouraged to have and pursue their passions, and work/life balance is encouraged. The emphasis on individualism creates sustainability. But, in the face of imminent demographic decline, there is not enough time for a cultural revolution – so it’s off to the guillotine, particularly for the after school tutoring segment. We are skeptical of the long-term effects of these policies, but we remain out of education and property in the near term.
(Disclaimer: We own BILI)