It needs to wean off dependence on exports in favour of local consumption
Reuters 9 December 2008
(BEIJING) Who would have thought, a few months ago, that China might end up remembering 2008 not for the Beijing Olympics or May’s Sichuan earthquake but for the demise of the country’s model of economic development? Might is the operative word. China’s attachment to investment, exports and heavy industry runs deep.
After all, these have been the drivers of the remarkable growth of 10 per cent a year that China has enjoyed since it embarked on market reforms 30 years ago this month, lifting hundreds of millions of people out of poverty in the process.
Weaning the economy off exports in favour of domestic consumption driven by services is easier said than done.
But the closure of thousands of factories as export demand evaporates has dealt a serious blow to China’s confidence.
President Hu Jintao has gone so far as to say that turning the challenges posed by the global credit crisis into opportunities would be a test of the Communist Party’s capacity to govern.
China, in short, realises that it needs to stand on its own feet.
So expectations are running high that a meeting starting yesterday of China’s top leaders to chart economic policy for 2009 will finally get serious about boosting home-grown spending.
The scale of the task is daunting. Household consumption last year made up just 35.3 per cent of China’s gross domestic product (GDP), a record low for a major country in peacetime. In the 1980s, it was over 50 per cent.
By comparison, the US ratio last year was 72 per cent. If America spends too much for the sake of global economic balance, China has taken thrift to new extremes. That needs to change.
Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, cites the pending nationwide expansion of a scheme offering a 13 per cent tax break to rural buyers of televisions and washing machines as evidence that China is already looking to tap its own potential.
The initial pilot programme in a handful of provinces led to a 40 per cent increase in sales of household appliances.
‘The fact manufacturers are turning to Chinese villagers rather than American consumers is a symbolic milestone in the global rebalancing story,’ Mr. Simpfendorfer said.
‘This is a slow burn story. It won’t save the global economy from its current problems. But it may help to shape the global economy over the next decade,’ he added.
Raising the income tax threshold; pay rises for state workers; increases in housing subsidies and minimum income support; and extra outlays on health, pensions and education are among other ideas that this week’s strategy sessions will examine to get people to spend more freely.
But, sceptics ask, if Beijing is so serious about increasing disposable incomes, why is the state budget for health care and education so puny? These are the two largest out-of-pocket expenses for most Chinese.
Public spending on health care and education comes to just 1.8 per cent and 2.5 per cent of GDP respectively, well below the global average. And only one per cent of China’s new four trillion yuan (S$883.6 billion) stimulus plan is earmarked for the two sectors.
One of the rationalisations is that China has not had the bureaucracy in place to ensure that extra money is used wisely.
It’s easy to pour concrete to build a clinic. It’s tougher to train doctors and nurses and administer a medical insurance scheme across a sprawling, developing country - to say nothing of making sure that the money is not siphoned off.
But Calla Wiemer, a visiting scholar at the University of California at Los Angeles’ Center for Chinese Studies, said that China has made notable progress in recent years by shifting responsibility for the delivery of social services from towns and villages to the county level, where personnel are better trained.
By last year, 86 per cent of rural counties had established cooperative medical schemes, she said in a recent opinion piece.
‘While these have not been ambitious in terms of the dollar amounts - the level of coverage is typically under US$10 per person per year - they’ve contributed importantly to administrative capacity building,’ she wrote.
David Dollar, head of the World Bank office in Beijing, makes a similar point. ‘The institutional structures are in place so that the government could increase spending quite significantly and quite effectively,’ he said. ‘It would be both good fiscal stimulus and it would help with the whole social development agenda.’
That sounds like common sense, but some scholars wonder whether China has the political set-up needed to accommodate a switch from infrastructure to social spending.
Chen Zhiwu, a finance professor at Yale School of Management, argued that returning money to the people - through lower taxes or spending on social programmes - is not a priority in China because its leaders do not have to stand for election.
This explains not only why democracies such as Brazil and India lag behind China in infrastructure but why China’s economic stimulus package is concentrated on road and rail building.
‘In a non-democracy, officials are held accountable to their superiors, not voters. And for one’s superiors, tangible projects are the easiest to recognise,’ Prof Chen said in a syndicated column.
For 30 years, concentrating resources in the hands of the government through state ownership and taxes has served China well. But the private consumption needed to power self- sustained growth is lacking. For that, Prof Chen argued, China must boost incomes and increase people’s sense of financial security. ‘Building a nation demands more than steel and concrete,’ he wrote.
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China’s Economy Needs to Stand on Its Own Feet
It needs to wean off dependence on exports in favour of local consumption
Reuters
9 December 2008
(BEIJING) Who would have thought, a few months ago, that China might end up remembering 2008 not for the Beijing Olympics or May’s Sichuan earthquake but for the demise of the country’s model of economic development? Might is the operative word. China’s attachment to investment, exports and heavy industry runs deep.
After all, these have been the drivers of the remarkable growth of 10 per cent a year that China has enjoyed since it embarked on market reforms 30 years ago this month, lifting hundreds of millions of people out of poverty in the process.
Weaning the economy off exports in favour of domestic consumption driven by services is easier said than done.
But the closure of thousands of factories as export demand evaporates has dealt a serious blow to China’s confidence.
President Hu Jintao has gone so far as to say that turning the challenges posed by the global credit crisis into opportunities would be a test of the Communist Party’s capacity to govern.
China, in short, realises that it needs to stand on its own feet.
So expectations are running high that a meeting starting yesterday of China’s top leaders to chart economic policy for 2009 will finally get serious about boosting home-grown spending.
The scale of the task is daunting. Household consumption last year made up just 35.3 per cent of China’s gross domestic product (GDP), a record low for a major country in peacetime. In the 1980s, it was over 50 per cent.
By comparison, the US ratio last year was 72 per cent. If America spends too much for the sake of global economic balance, China has taken thrift to new extremes. That needs to change.
Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, cites the pending nationwide expansion of a scheme offering a 13 per cent tax break to rural buyers of televisions and washing machines as evidence that China is already looking to tap its own potential.
The initial pilot programme in a handful of provinces led to a 40 per cent increase in sales of household appliances.
‘The fact manufacturers are turning to Chinese villagers rather than American consumers is a symbolic milestone in the global rebalancing story,’ Mr. Simpfendorfer said.
‘This is a slow burn story. It won’t save the global economy from its current problems. But it may help to shape the global economy over the next decade,’ he added.
Raising the income tax threshold; pay rises for state workers; increases in housing subsidies and minimum income support; and extra outlays on health, pensions and education are among other ideas that this week’s strategy sessions will examine to get people to spend more freely.
But, sceptics ask, if Beijing is so serious about increasing disposable incomes, why is the state budget for health care and education so puny? These are the two largest out-of-pocket expenses for most Chinese.
Public spending on health care and education comes to just 1.8 per cent and 2.5 per cent of GDP respectively, well below the global average. And only one per cent of China’s new four trillion yuan (S$883.6 billion) stimulus plan is earmarked for the two sectors.
One of the rationalisations is that China has not had the bureaucracy in place to ensure that extra money is used wisely.
It’s easy to pour concrete to build a clinic. It’s tougher to train doctors and nurses and administer a medical insurance scheme across a sprawling, developing country - to say nothing of making sure that the money is not siphoned off.
But Calla Wiemer, a visiting scholar at the University of California at Los Angeles’ Center for Chinese Studies, said that China has made notable progress in recent years by shifting responsibility for the delivery of social services from towns and villages to the county level, where personnel are better trained.
By last year, 86 per cent of rural counties had established cooperative medical schemes, she said in a recent opinion piece.
‘While these have not been ambitious in terms of the dollar amounts - the level of coverage is typically under US$10 per person per year - they’ve contributed importantly to administrative capacity building,’ she wrote.
David Dollar, head of the World Bank office in Beijing, makes a similar point. ‘The institutional structures are in place so that the government could increase spending quite significantly and quite effectively,’ he said. ‘It would be both good fiscal stimulus and it would help with the whole social development agenda.’
That sounds like common sense, but some scholars wonder whether China has the political set-up needed to accommodate a switch from infrastructure to social spending.
Chen Zhiwu, a finance professor at Yale School of Management, argued that returning money to the people - through lower taxes or spending on social programmes - is not a priority in China because its leaders do not have to stand for election.
This explains not only why democracies such as Brazil and India lag behind China in infrastructure but why China’s economic stimulus package is concentrated on road and rail building.
‘In a non-democracy, officials are held accountable to their superiors, not voters. And for one’s superiors, tangible projects are the easiest to recognise,’ Prof Chen said in a syndicated column.
For 30 years, concentrating resources in the hands of the government through state ownership and taxes has served China well. But the private consumption needed to power self- sustained growth is lacking. For that, Prof Chen argued, China must boost incomes and increase people’s sense of financial security. ‘Building a nation demands more than steel and concrete,’ he wrote.
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