The End of China's One-Child Policy Means Big Things in the Baby Food Industry

Last week, China announced that it would officially lift its infamous long-standing one-child policy. There's a lot to take away from the announcement, and much to think about going forward: the implications of an aging population and a shortage of future workers; the realization that even though the Chinese government is allowing couples to have two children, it will still officiate family planning; the predictions that many couples, despite being allowed to have a second child, will opt not to do so given the economic outlook.

Maybe you were quietly wondering what a larger China would mean for climate change. But if your first thoughts were to buy up stocks of companies that make baby formula and strollers—and to dump your shares in the condom industry—you're probably a banker.

China's two-child policy has manufacturers of baby products seeing green and condom-makers seeing red (or, in China, the opposite, as red is a lucky color in China and indicates that a stock is rising, while green means it's losing value). With the new policy, investors are predicting increased demand for baby-related products, and stocks for companies that produced baby formula, baby food, baby shampoo, strollers, and car seats surged last Thursday. The company that makes Durex, on the other hand, took a hit, as did the Japanese condom-maker Okamoto Inc.

Some experts are expecting three to eight million more births per year under the new policy. That's a whole lot of baby formula, and everyone from the big dogs of baby food manufacturing down to mom and pop stores are expecting increased demand for baby items.

Others, however, think that the boon to business could be more modest. A policy introduced two years ago allowed couples to have two children if one of the spouses was an only child, and the expected onrush of babies never materialized. Only 7 percent of the 11 million couples eligible under that easing took advantage of the policy. The economic slowdown means many parents might decide that they can't afford the cost of raising a second child.

The Chinese government enacted the one-child policy in the late 1970s to curtail precipitous population growth and raise the standard of living. Now, China is looking at a demographics problem, as the population of elderly Chinese looks to explode while its working-age population is shrinking. The situation looks like it could derail China's economic climb, and, hoping to keep the progress going, last Thursday China announced the end of one of the core policies of Communist Party leadership. Married couples will be allowed to have two children starting next year.

Baby formula was already a hot topic in China. In 2008, six infants died, 50,000 were hospitalized, and almost 300,000 sickened when tainted milk and infant formula made its way to the market. Two people were executed for their role in the crime.

Such incidents have led to greater demand for European and Australian baby formulas, which many Chinese parents think is safer than Chinese brands. Due to tariffs on imported brands, there's a grey market for foreign milk products and formula, which Chinese abroad send home to friends and relatives. Shares of Danone, a French manufacturer of formula, rose nearly 3 percent after last week's announcement.

But what's good for baby formula is apparently bad for the condom business, with shares of the popular condom maker Okamoto Inc. falling by 10 percent following the announcement, though they've since recovered somewhat.

The world, and the market, works in uncomfortable ways.