Video: What Could Be Behind China's Sudden One-Child Policy Reforms

In a 2010 interview, economic theorist Michael Pettis says demographic imbalances could lead to a "great slowdown" in economic growth.

The Chinese government announced earlier today it would loosen its restrictive one-child policy. But why now? The answer has to do with economic growth.

In an 2010 interview for ChinaBOOM, a project of Asia Society's Center on U.S.-China Relations, Beijing-based economic theorist Michael Pettis said China's economic fortunes have long been tied to its demographics.

"From basically the early '50s until the mid-1970s, China had a real demographic problem," he said. "The share of the population that works... was contracting quite rapidly."

But the one-child policy changed all that in the 1970s by drastically reducing the number of young dependents.

"The dependents are the old and the young and, when you eliminate the young, the working population is a much bigger share of the total population," said Pettis.

For the last few decades, China's economy has enjoyed the benefits of its comparatively large workforce and comparatively few dependents. But now many of those workers are now retiring, and there aren't enough young people to take their place.

"In a lot of countries, we've seen that when this dependency ratio deteriorates, there is economic stagnation," said Pettis. "And if I'm right, then the next 30 to 40 years, we're going to see a great slowdown in growth, because that demographic sweet spot is reversing."

That's why it makes sense for China's leaders to relax the one-child policy today. More children now means a larger working-age population in about two decades, when China will have to support a historic level of elderly dependents.

In the short term, though, this reform could conceivably create a slowdown effect by increasing the number of young dependents. And it certainly doesn't help China's overall population problem.

The way Xi's administration choreographs this delicate demographic dance will be key to any larger economic reform package. The future of China depends on it.