Falling Chinese birth rates set to drag down global milk formula market

Goldman Sachs has warned investors to expect five years of zero growth in the global market for infant milk formula, as China approaches a critical demographic inflection point and the world’s most important market runs short of new babies.

Chinese infants, whose consumption of higher-end formula has surged in recent decades thanks to the rising middle-class incomes of their parents, had become the most important source of growth for a sector dominated by companies such as Danone, Reckitt and Abbott Laboratories.

However, in a report circulated to clients this week, the US investment bank said it had turned negative on the formula industry in light of its new forecast that China’s infant population would decline at an average 7 per cent per annum over the next five years.

The same forecast raised the possibility that by the end of 2022, deaths could outnumber births, putting China into population decline — a point passed by Japan in 2016, and which can trigger significant revisions to economic modelling.

Earlier this year, wrote Goldman analyst John Ennis, the bank had anticipated a fairly moderate drop in the Chinese baby population. Now, it expects new births in 2022 will have fallen 12 per cent from the previous year, and will decline a further 5 per cent in 2023.

This means that the infant population in 2023 could be about 45 per cent lower than the level in 2016, Ennis said. The Chinese infant formula market could experience an 8 per cent decline this year, before compounding 4 per cent declines over the coming five years, he added.

The predicted contraction of China’s baby population may contrast with markets such as the US, where the population is stabilising, but Goldman argued that the total picture, including western Europe, is poor.

International groups such as Nestlé, Danone, A2 Milk and Abbott would generally underperform, the report predicted, while the situation was likely to create opportunities for local Chinese companies Feihe and Yili to gain market share.

“We do not expect the market to offer much growth, which stands in stark comparison to the prior growth credentials of this market over the previous decade, when average sales growth was around 5 per cent per annum,” wrote Ennis.

The report represents a blow to the Chinese government under President Xi Jinping, which has implemented sweeping policy overhauls in an effort to reverse the country’s deteriorating demographic picture.

After years of ruthless application of the one-child policy — including forced sterilisation, contraception and abortions — Beijing has notably unwound prohibitive birth restrictions, including in 2015 officially allowing all couples to have two children.

Chinese officials, as with their counterparts in Seoul and Tokyo, are also experimenting with incentives targeted at easing the financial burden faced by women who have children, such as longer maternity leave and more expansive childcare, as well as subsidies for those who have more than one child.

Last year, Xi introduced a banner policy of “common prosperity” which sought in part to ease pressures on families in order to arrest the population decline.

But birth rates in China have remained among the world’s lowest. As economic pressures mount, marriages have fallen to their lowest point in four decades, while youth unemployment, at more than 19 per cent, is at its highest level in recent history, further denting Xi’s chances of combating the problem.

Additional reporting by Maiqi Ding in Beijing