The ruling Communist Party also said late Friday the country's much-criticized labor camp system would be abolished. The changes were part of a key policy document following a four-day meeting of party leaders through Tuesday.
The party said families in which at least one parent was an only child would be allowed to have a second child themselves. Previously, both parents had to be an only child to qualify for this exemption. Rural couples are allowed two children if their first-born child is a girl, an exemption made in 1984 that was the last substantive change to the policy.
Demographers argue that the population policy has created an aging crisis by limiting the size of the young labor pool that must support the large baby boom generation as it retires.
"It's great, finally the Chinese government is officially acknowledging the demographic challenges it is facing," said Cai Yong, an assistant professor of sociology at the University of North Carolina, Chapel Hill.
"Although this is, relatively speaking, a small step, I think it's a positive step in the right direction and hope that this will be a transition to a more relaxed policy and eventual return of reproductive freedom to the Chinese people," Cai said.
The Chinese government credits the one-child policy introduced in 1980 with preventing hundreds of millions of births and helping lift countless families out of poverty. But the strict limits have led to forced abortions and sterilizations by local officials, even though such measures are illegal. Couples who flout the rules face hefty fines, seizure of their property and loss of their jobs.
Last year, a government think tank urged China's leaders to start phasing out the policy and allow two children for every family by 2015, saying the country had paid a "huge political and social cost."
The China Development Research Foundation said the policy had resulted in social conflict, high administrative costs and led indirectly to a long-term gender imbalance because of illegal abortions of female fetuses and the infanticide of baby girls by parents who cling to a traditional preference for a son.
The policy document does not specify when the family-size change takes effect, but details are expected when government offices roll out implementation plans later.
The policy document released Friday maps out China's economic policy for coming decade, but also includes directives on improving the judicial system, helping farmers become city residents, maintaining controls on online expression and other issues. It also elaborates on the party's previous announcement that it would set up a national security commission.
The party announced at the same time that it would abolish a labor camp system that allowed police to lock up government critics and other defendants for up to four years without trial. It confirmed a development that had been reportedly announced by the country's top law enforcement official earlier this year but was later retracted.
Also known as "re-education through labor," the system was established to punish early critics of the Communist Party but has been used by local officials to deal with people challenging their authority on issues including land rights and corruption.
Pu Zhiqiang, a prominent Beijing lawyer who has represented several former labor camp detainees in seeking compensation, welcomed the abolition of the extra-legal system.
"There have been many methods used recently by this government that are against the rule of law, and do not respect human rights, or freedom of speech," Pu said. "But by abolishing the labor camps ... it makes it much harder for the police to put these people they clamp down on into labor camps."
"This is progress," Pu said.
Earlier this year, state broadcaster CCTV said China has 310 labor camps holding about 310,000 prisoners and employing 100,000 staff.
Associated Press reporter Isolda Morillo contributed to this report.
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