News last Friday suggested that the Chinese government could relax its onechild policy as early as end-2013 or beginning 2014. According to reports carried by 21 Century Business Herald , the government could implement the “dandu" policy on a national basis across both urban and rural areas. This policy, currently being trialed in a select number of rural locations, would allow a couple to have two children if either the husband or the wife has no siblings. If rolled out nationally, this would be a relaxation of the current "shuangdu" policy, which permits a couple to have two children only if both husband and wife have no siblings. Press reports also mentioned that a more ambitious “two-child policy” to allow all couples in China to have two children could be implemented after 2015.

Although unconfirmed, this news item was later echoed by a press release from the National Health and Family Planning Commission (NHFPC). Despite reiterating the necessity of controlling the total population in China, the statement disclosed that “the ministry is organizing relevant studies to modify the current regulations”.

We believe that the likely easing of the one-child policy is driven by: 1) the top leaders' belief that China's long-term growth potential could be enhanced by relaxing the one-child policy; 2) the receding influence of opposition from old senior officials to the relaxation; and 3) the institutional reform of the NHFPC, a new ministry consolidated from the former Ministry of Health and the National Population and Family Planning Commission.

Eoin Treacy's view Relaxing rules which have been deeply resented by the population is an easy way to improve public perceptions of the administration. In this regard China is no different from any other country. Additionally reforming the one child policy would be welcomed by the population at large and could be pitched as a move towards greater personal freedom in what remains a highly regulated society.

If population controls are eased the infant nutrition and hygiene sectors can be expected to benefit. Among Hong Kong listed companies engaged in infant formula, China Mengniu Dairy broke out of a more than three-year range last month. It is now somewhat overbought and susceptible to mean reversion. However, a sustained move below the 200-day MA, would be required to question medium-term upside potential.

China Modern Dairy rebounded emphatically from the July lows to retest the upper side of its range, It is now quite overextended and some consolidation appears more likely than not. (Also see a review of milk companies which was posted in Comment of the Day on August 5th).

In the diaper sector Hengan International is an S&P Pan Asia Dividend Aristocrat and yields 1.95%. The share quadrupled between 2008 and 2010 and has moved into a more gradual advance over the last few years. A break in the progression of higher reaction lows, currently near HK$74, would be required to question the medium-term upward bias.