This is a great question and one that I have been asked many times over the years in ministry. The bottom line is that everywhere Jesus went, He was preaching the Gospel and calling individuals to, "repent, believe, and be baptized." This is the proper response of one (adult or child) whose heart and mind has been made new by grace, through Christ and His Spirit. Repent, believe, be baptized. The question is: How do we know if a child is ready? How do we know if a child is truly regenerated, has genuinely surrendered to Christ in heart, mind, and will, and is therefore now ready to be baptized? Practically, we as pastors, along with a child's parents, need to do all that we can to discern whether true repentance and faith is present in this child. Here are the 4 big questions that guide me as I help the child and their parents in this process (I use these 4 questions in assessing the readiness of an adult for baptism as well):
1) Is there Knowledge? – Does this child have a right and proper knowledge and understanding of the Gospel of Jesus Christ and of Baptism? Can they articulate this?
2) Is there Brokenness? - Has this child been truly broken over their sin and not just the consequences of their sin? Are they heartbroken over the fact that they have sinned against a holy God and now realize that Jesus alone can save them?
3) Is there Repentance? – Does this child desire to repent, or turn, from their sin and toward Christ by faith? Does their brokenness over sin lead to active repentance and faith in Christ?
4) Is there a Treasuring? - Does this child see and savor Jesus as the greatest treasure of their life?
Typically, these four questions help the child, the parents, and myself, discern whether the child is ready for baptism. Many times after I ask these, parents are like, "Yes, we have seen not only knowledge, but authentic brokenness and repentance in Cindy." Or, "Oh no, we have never seen Timothy broken and repentant over his sin, though he definitely has knowledge of the Gospel and can articulate it." Or, "I would not say Max truly treasures Jesus at this point in his life." If it seems questionable whether a young person is ready to be baptized, I simply encourage parents to wait until they see more evidence and fruit of regeneration.
At the end of the day, we as pastors do the best we can do. Sometimes it is a tough call and in those cases I will often take the lead from the child's parents, assuming they are mature Christ-followers. If it is difficult for me to discern one way or another, I will usually trust the parents since ultimately they are the spiritual shepherds of their kids.