Enforcement of the one-child policy relies on combination of carrots and sticks.
First, the Incentives: Those who follow policy are awarded a “Certificate of Honor for Single-Child Parents” and given rewards in the form of longer maternity leave, interest-free loans, and other forms of social assistance and government subsidies such as better health care, state housing, and school enrollment. Government employees can receive an extra month salary each year until their child turns 14. Couples who delay marriage and having their first child are also eligible for similar benefits.
To boost compliance, the National Population and Family Planning Commission of China (NPFPC) offers free, universally accessible contraceptive. The New England Journal of Medicine estimated that more than 87% of China’s married women use contraception (compared to about one third in other developing countries).
Penalties (and enforcement) can vary depending on specific situation as well as by province and local municipality. Similarly, the law and penalties have continued to evolve (in general, becoming less draconian over the years).
However, for the vast majority of people caught breaking the law, the penalties are financial—large fines imposed (which vary by region but are typically several times the average annual income). For those unable or unwilling to pay the fine, more heavy-handed tactics can be applied, such as seizing property and houses, being dismissed from jobs, or having their kids pulled out of school. The system also makes it difficult to hide unregistered children (for example, the inability to apply for schooling, etc).
Although widely publicized in the media, the really draconian measures—such as forced sterilization or abortion—are relatively rare these days, the exception and not the rule. However, during the early days, these tactics were widespread, despite widespread resistance in the countryside (more on draconian tactics below).