Beijing may relax the country's one-child policy by the end of 2013, say China watchers, following local media reports in the recent days that the government is mulling changes to its highly unpopular restriction that has been in place for three and a half decades.

"China's one-child policy could be eased around end-2013. We believe that the reform-minded president Xi and premier Li will use the opportunity of abolishing the one-child policy to build up their authority, show their determination in making changes and convince the Chinese people that they do have a roadmap for reforms," Ting Lu and Xiaojia Zhi, China economists at Bank of America Merrill Lynch (BoFAML) wrote in a note over the weekend.

(Read More: The Backroom Battle Delaying Reform of China's One-Child Policy)



State news agency Xinhua late Friday reported that policymakers are deliberating whether to allow couples, where one parent is an only child, to have two children. Currently, both parents must be sole children to be eligible for a second child. The government is also assessing whether to allow all families to have two children after 2015, according to local media.

BoFAML estimates that the policy change, if implemented, could result in 9.5 million additional babies being born in the first five years post reform, or almost 2 million per year, as women fulfill their desire to have a second child. Approximately 16 million babies are born in the mainland each year.

"Most urban women of child-bearing age would likely be single children married to another single child, meaning most couples would already be eligible to have two children even under the one-child policy," the bank explained.



The policy, which was introduced in 1978, is strongly enforced in urban areas. Rural families, meanwhile, are able to have two children, if the first one is a girl.

(Read More:In China, Signs That One-Child Policy May Be Coming to An End)

While a change in policy is unlikely to lead to a dramatic increase in the rate of population growth, the bank notes that family planning reforms are critical in the face of the country's deteriorating demographics that pose risks to longer-term social stability and economic growth.

China's population is forecast to peak by 2020 at around 1.4 billion before declining rapidly, according to the bank. The country faces a rapidly aging population - with those aged 65 and above likely to reach 29 percent by 2050, from 9 percent in 2011 – putting pressure on labor supply in the country.

(Read More: Use of Student Interns Highlights China Labor Shortage)



Zhiwei Zhang, chief China economist at Nomura, who agrees the chance of reforming the one-child policy is rising, said the implications over the next two decades are mixed.

A rise in the country's birth rate could lead to a decline in the savings rate, said Zhang, which may weigh on investment growth. A higher savings rate means more money is available for investment.

On the positive side, however, a higher birth rate would help rebalance the economy towards a more consumption-driven model, he said.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

