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China's economy needs spending power as reform benefits people
By James Gibney and Mark Whitehouse |
July 13, 2012, Friday
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Print Edition
Print Edition
CHINA is set to release its most recent figures on economic growth today, which has been estimated to hit the slowest rate in three years. Real estate prices, trade growth, construction and luxury watch sales are all declining.
The global economic slump and the persistent crisis in Europe have left China's export engine revved up but with fewer places to go. As a result, the government is focusing on homegrown methods to boost growth, such as promoting domestic investment.
A better approach would be for China's government to help its people and their economy by putting more money into public goods. With more than US$3 trillion in foreign reserves and a relatively light public debt burden, China is in a better position than most to shoulder such expenditures.
Beyond that, China needs to rely more on domestic consumption. To some extent, this is already happening: In the first quarter, domestic consumption accounted for 43 percent of GDP growth, versus 28 percent a year earlier. Rather than supporting this trend with cheap credit, China should start structural reforms that will create real spending power.
Promising area
One promising area is labor market liberalization. Wages are on the rise as demographic trends shrink China's labor force. Revising or eliminating China's residential registration system would enable more rural workers to migrate legally to the cities, improving productivity, spurring consumer spending and reducing inequality.
Another option is to enable ordinary Chinese savers to access investments other than low-paying bank deposits. This would allow them to achieve market returns, alleviating concerns about retirement and freeing up spending money. The government recently took a small step in this direction by slightly widening the band for deposit rates.
More broadly, the state has the power to spur competition and economic growth by liberalizing the terms under which entrepreneurs and private companies can buy land and access financing. A pilot program started in Wenzhou this March supports the creation of various new private funding mechanisms, including village banks, small lending companies and the issuance of securities. Opening the market to foreign banks would also expand financing opportunities.
Chinese leaders have managed to take some key steps over the past six months toward transforming the economy, such as widening the band for the yuan's exchange rate against the US dollar and relaxing rules for foreign direct investment. Initiatives such as changing deposit rates and promoting small-business lending will ultimately have positive results.
James Gibney and Mark Whitehouse are editors of Bloomberg View. Shanghai Daily condensed the article.
The global economic slump and the persistent crisis in Europe have left China's export engine revved up but with fewer places to go. As a result, the government is focusing on homegrown methods to boost growth, such as promoting domestic investment.
A better approach would be for China's government to help its people and their economy by putting more money into public goods. With more than US$3 trillion in foreign reserves and a relatively light public debt burden, China is in a better position than most to shoulder such expenditures.
Beyond that, China needs to rely more on domestic consumption. To some extent, this is already happening: In the first quarter, domestic consumption accounted for 43 percent of GDP growth, versus 28 percent a year earlier. Rather than supporting this trend with cheap credit, China should start structural reforms that will create real spending power.
Promising area
One promising area is labor market liberalization. Wages are on the rise as demographic trends shrink China's labor force. Revising or eliminating China's residential registration system would enable more rural workers to migrate legally to the cities, improving productivity, spurring consumer spending and reducing inequality.
Another option is to enable ordinary Chinese savers to access investments other than low-paying bank deposits. This would allow them to achieve market returns, alleviating concerns about retirement and freeing up spending money. The government recently took a small step in this direction by slightly widening the band for deposit rates.
More broadly, the state has the power to spur competition and economic growth by liberalizing the terms under which entrepreneurs and private companies can buy land and access financing. A pilot program started in Wenzhou this March supports the creation of various new private funding mechanisms, including village banks, small lending companies and the issuance of securities. Opening the market to foreign banks would also expand financing opportunities.
Chinese leaders have managed to take some key steps over the past six months toward transforming the economy, such as widening the band for the yuan's exchange rate against the US dollar and relaxing rules for foreign direct investment. Initiatives such as changing deposit rates and promoting small-business lending will ultimately have positive results.
James Gibney and Mark Whitehouse are editors of Bloomberg View. Shanghai Daily condensed the article.
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