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Dr. P.V. Viswanath |
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As Its Economy Sprints Ahead, China’s People Are Left Behind |
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By DAVID BARBOZA, The Economist, October 9, 2011 |
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JILIN CITY, China — Wang Jianping and his wife, Shue, are a relatively affluent Chinese couple, with an annual household income of $16,000 — more than double the national average for urban families. They own a modest, three-bedroom apartment here in this northeastern industrial city. They paid for their son to study electrical engineering at prestigious Tsinghua University, in Beijing. And even by frugal Asian standards, they are prodigious savers, with $50,000 in a state-run bank. But like many other Chinese families, the Wangs feel pressed. They do not own a car, and they rarely go shopping or out to eat. That is because the value of their nest egg is shrinking, through no fault of their own. Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future. Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people. This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement. Meanwhile, striving middle-class families like the Wangs are unable to enjoy the full fruits of China’s economic miracle. “This is the foundation of the whole system,” said Carl E. Walter, a former J. P. Morgan executive who is co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “The banks make loans to who the Communist Party tells them to,” Mr. Walter said. “So they punish the household savers in favor of the state-owned companies.” It is not just China’s problem. Economists say that for China to continue serving as one of the world’s few engines of economic growth, it will need to cultivate a consumer class that buys more of the world’s products and services, and shares more fully in the nation’s wealth. But rather than rising, China’s consumer spending has actually plummeted in the last decade as a portion of the overall economy, to about 35 percent of gross domestic product, from about 45 percent. That figure is by far the lowest percentage for any big economy anywhere in the world. (Even in the sleepwalking American economy, the level is about 70 percent of G.D.P.) Unless China starts giving its own people more spending power, some experts warn, the nation could gradually slip into the slow-growth malaise that now afflicts the United States, Europe and Japan. Already this year, China’s economic growth rate has begun to cool off. “This growth model is past its sell-by date,” says Michael Pettis, a professor of finance at Peking University and senior associate at the Carnegie Endowment for International Peace. “If China is going to continue to grow, this system will have to change. They’re going to have to stop penalizing households.” The Communist Party, in its latest five-year plan, has promised to bolster personal consumption. But doing so would risk undermining a pillar of the country’s current financial system: the household savings that support the government-run banks. Here in Jilin City, where chemical manufacturing is the dominant industry, the state banks are flush with money from savings accounts. The banks use that money to make low-interest loans to corporate beneficiaries — including real estate developers, helping fuel a speculative property bubble that has raised housing prices beyond the reach of many consumers. It is a dynamic that has played out in dozens of cities throughout China. Meanwhile, China’s central bank in Beijing also depends on the nation’s vast pool of consumer savings to help finance its big investments in the foreign exchange markets, as a way to keep the currency artificially weak. The weak currency helps sustain China’s mighty export economy by lowering the global price of Chinese goods. But it also makes imports unaffordable for many Chinese people. News reports of the nouveaux riches in Beijing and Shanghai snapping up Apple iPhones, Gucci bags and Rolex watches may conjure Western business dreams of China’s becoming the world’s biggest consumer market. But consumer choice here in Jilin and many other heartland cities is confined largely to the limited offerings of dingy state-run department stores and mom-and-pop shops. Any sales of global “brands” come mainly in the form of the counterfeits and knockoffs often sold at outdoor markets. On a recent weekday at the Henan Street flea market, crowds sifted through stacks of clothes that included $3 T-shirts with images of Minnie Mouse and $5 imitation Nike sports jerseys. Just a few yards away, an authentic Nike store selling the real thing for $35 had nary a shopper. Because consumers have so little spending power, many global-brand companies do not even bother to open stores in cities like Jilin. With the faltering economies of the United States, Europe and Japan limiting China’s ability to continue relying on growth through exports, the Chinese government knows the importance of giving its own consumers more buying power. Already, the central government has pushed to raise rural incomes and has even offered subsidies to buy cars and household appliances. The question is whether the government can change its entrenched economic system enough to truly make a difference. “The central government is committed to increasing the share of consumption in G.D.P.,” says Li Daokui, a professor of economics at Tsinghua University and a longtime government adviser. “The issue is what is going to be the means.” THE SAVERS Frugality Born Of Necessity If China is to make consumer spending a much larger share of the economy, it will need to encourage big changes in the habits of people like Mr. Wang, 52, a highway design specialist, and Ms. Wang, also 52, who retired as an accountant seven years ago because of health problems. “We’re quite traditional,” says Ms. Wang, who draws a pension. “We don’t like to spend tomorrow’s money today.” But tomorrow’s money may not be worth as much as today’s — not as long as their savings account earns only a 3 percent interest rate while inflation lopes along at 6 percent or more. Yet the Wangs see no good alternatives to stashing nearly two-thirds of their monthly income in the bank. They are afraid to invest in China’s notoriously volatile stock market. And Chinese law sharply limits their ability to invest overseas or otherwise send money outside the country. Nor do the Wangs feel flush or daring enough to join the real estate speculation that some Chinese now see as one of the few ways to get a return on their money — risky as that might prove if the bubble bursts. Mainly, like many in China, the Wangs save because they worry about soaring food prices and the high cost of health care, which the People’s Republic no longer fully provides. They also worry about whether they can afford to buy a home for their son, a cost that Chinese parents are expected to bear when their male children marry. “If you have a daughter, it’s not so expensive,” Wang Shue said. “But with a son you have to save money.” Housing prices have become crucial in pushing up savings rates. Here, too, analysts say government policies are shifting wealth away from households. In the case of the Wangs, they are being forced to move to make way for a new real estate development authorized by municipal authorities — the sort of project that local governments throughout China have come to regard as an easy source of riches. Although the Wangs and other current residents have received some cash compensation for the apartments they are leaving, the Jilin City government has sold the land to a developer that plans to demolish the current dwellings and erect a new complex with more, and more expensive, apartments. The Wangs are not sure they will be able to find a home comparable to their current apartment from the money they are being paid. But the developer and the local government are expected jointly to earn a profit of more than $50 million. A POLICY’S HISTORY Averting a Crisis, But Forming a Habit Why would China, which hopes eventually to surpass the United States as the world’s biggest economy, deliberately suppress the consumer market that might help it reach that goal? Some analysts trace the current policies to habits formed in the late 1990s. That’s when the bloat of China’s giant, uncompetitive state-run corporations nearly brought China’s economic expansion to a standstill. Suddenly, with state-owned companies facing bankruptcy, the state banks were saddled with hundreds of billions of dollars in nonperforming loans; many banks faced insolvency. To avert a crisis, Beijing allowed state-owned companies to lay off tens of millions of workers. In 1999 just one of those companies, the parent of PetroChina, a big oil conglomerate, announced the layoff of a million employees. And to shore up the banks, Beijing assumed tighter control over interest rates, which included sharply lowering the effective rates paid to depositors. A passbook account that might have earned 3 percent in 2002, after inflation, would today be effectively losing 3 to 5 percent, once inflation is factored in. That is how Chinese banks can provide extremely cheap financing to state-owned companies while still recording huge profits. It has also helped the banks provide easy financing for big public works projects, which besides the high-speed train system have included the 2008 Beijing Olympics and the monumental Three Gorges Dam. It was during this same period that the Communist government discarded the longstanding “iron rice bowl” promise of lifelong employment and state care. Beijing shifted more of the high costs of social services — including housing, education and medical care — onto households and the private sector. Together, these measures added up to the managed-market system now known as state capitalism. They worked so well that they not only helped resuscitate China’s failing banks and state companies, but also fueled the nation’s economic boom for more than a decade. But the system also took an enormous economic toll on personal pocketbooks. “We’d like to spend, but we really have nothing left over after paying the bills,” said Yang Yang, 34, a school administrator who lives in Jilin City with her husband, a police officer, and their son, 10. “Even though our son goes to a public school, we need to pay fees for after-school courses, which everyone is expected to take. Almost every family will do this. So there’s a lot of pressure on us to do it, too.” To save money, Ms. Yang, her husband and son recently moved in with her parents. Nicholas R. Lardy, an economist at the Peterson Institute for International Economics in Washington, calculates that the government policies exacted a hidden tax on Chinese households that amounted to about $36 billion in 2008 alone — or about 4 percent of China’s gross domestic product. Over the last decade, Mr. Lardy says, that figure probably amounted to hundreds of billions of dollars — money that banks essentially took from consumers’ hands. The distortions may have actually cost households far more, because his figures do not include hidden costs like artificially high prices for imports. For many Chinese economists, the state capitalism that helped jump-start growth has become counterproductive. “China is already beyond the point where the law of diminishing returns starts biting,” said Xu Xiaonian, an economist who teaches at the China Europe International Business School in Shanghai. Mr. Xu argues that China risks repeating the mistakes Japan made in the 1980s and early 1990s, when it relied too long on a predominantly export economy, neglected domestic markets and allowed real estate prices to soar. Since Japan’s bubble burst in the mid-1990s, its economy has never really recovered. “If we don’t change, we will follow those same footsteps,” Mr. Xu said. “We have already seen the early signs of what we might call the Japanese disease. China invests more and more, but those investments generate less and less growth.” PREDICTIONS FOR CHANGE A Radical Overhaul, But Within Reach Some economists predict major changes, noting that the Chinese government has the cash and the power to alter course as drastically as it did in the late ’90s, this time in the people’s favor. “China has faced more daunting challenges in the past,” said Wei Shangjin, a professor at the Columbia Business School. “I don’t doubt that they want to do it. The question is, Can they successfully engineer such a major restructuring of the economy?” Certainly, multinationals like McDonald’s, Nike and Procter & Gamble are still betting billions of dollars that China will grow into the world’s biggest consumer market within a few decades. But raising consumption will require a radical overhaul of the Chinese economy — not just weaning state banks off household subsidies but forcing state-run firms to pay much higher borrowing rates. It would also mean letting the currency rise closer to whatever value it might naturally reach. It would mean, in other words, a significant dismantling of the state capitalism that has enabled China to come so far so fast. “To get consumption to surge,” said Mr. Pettis, the Peking University lecturer, “you need to stop taking money from the household sector.” Issues:
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