Spe­cial Re­port: The Chi­nese con­sumer awak­ens

The Pak Banker - - International3 -

XI­AHE: In the Ti­betan monastery town of Xi­ahe, Gyelyan­jia is vis­it­ing for a fes­ti­val and tak­ing the op­por­tu­nity to do some shop­ping.

He has spent 20 yuan ($3) at Ding's elec­tri­cal ap­pli­ance shop on a heat-belt, which he can fill with boil­ing wa­ter and strap around his waist to ward off the bit­ter win­ter chill on the Hi­malayan plateau.

The 66-year-old grins: "I al­ready have a tele­vi­sion at home. But I would like a wash­ing ma­chine and a fridge. I hope to buy those next year."

Ti­mothy Gei­th­ner har­bors sim­i­lar hopes. The U.S. Trea­sury Sec­re­tary is count­ing on hun­dreds of mil­lions of Chi­nese like Gyelyan­jia to spend more and save less.

That way, Chi­nese fac­to­ries would pro­duce more for do­mes­tic

con­sump­tion and less for ex­port, help­ing to nar­row the trade im­bal­ances that are desta­bi­liz­ing the global econ­omy.

Chi­nese con­sump­tion is, in fact, strong. It has grown by more than 9 per­cent a year, af­ter ad­just­ment for in­fla­tion, over the past decade. China over­took the United States in 2009 as the world's lead­ing au­to­mo­bile mar­ket. The realestate mar­ket is on fire, swelling de­mand for ap­pli­ances and fur­ni­ture. China is No. 2 in sales of lux­ury goods.

There are no lux­u­ries for sale in Xi­ahe, a rapidly de­vel­op­ing town in the western prov­ince of Gansu and home to Labrang monastery, the largest out­side Ti­bet.

IN­VEST­MENT TRUMPS CON­SUMP­TION

Spend­ing might be sturdy in China, but in­vest­ment has been off the charts. As a re­sult, con­sump­tion was just 35.6 per­cent of Gross Do­mes­tic Prod­uct in 2009, from 46.1 per­cent a decade ear­lier - and that was helped by a mas­sive govern­ment stim­u­lus to counter the global fi­nan­cial cri­sis.

The task for China's pol­i­cy­mak­ers is to lift that pro­por­tion by boost­ing wages, speed­ing up ur­ban­iza­tion and build­ing a so­cial safety net so peo­ple do not need to save so much for a rainy day. VESTED IN­TER­ESTS The logic be­hind ag­gres­sive ex­pan­sion plans sounds com­pelling. But they will pay off only if the Com­mu­nist Party is pre­pared to over­turn China's growth model. That means tak­ing on vested in­ter­ests that thrive fi­nan­cially and po­lit­i­cally from the way the econ­omy is run, from well-con­nected prop­erty de­vel­op­ers and their friends in lo­cal govern­ment, to the Party bosses of banks and big firms who wield im­mense power in their in­dus­tries.

GET­TING RICH IS GLO­RI­OUS

China's trans­for­ma­tion from an im­pov­er­ished back­wa­ter to the world's sec­ond-largest econ­omy has cre­ated an army of su­per wealthy who seized on the mar­ket re­forms that Deng Xiaop­ing launched in the late 1970s. "To get rich is glo­ri­ous," Deng Xiaop­ing is said to have de­clared, sound­ing a ral­ly­ing cry to as­tute pri­vate en­trepreneurs and un­scrupu­lous strip­pers of state as­sets alike.

NO SHORT­AGE PEAS­ANTS

Apart from the un­em­ployed and un­der­em­ployed in its cities, China could grow its food much more ef­fi­ciently. Fang Cai, di­rec­tor of the In­sti­tute of Pop­u­la­tion and La­bor Eco­nom­ics at the Chi­nese Academy of So­cial Sci­ences, es­ti­mated in 2008 that China had 107 mil­lion sur­plus ru­ral la­bor­ers or 22 per­cent of the work force in the coun­try­side.

Lu with BoA Mer­rill Lynch es­ti­mates the 20-45 age group will shrivel from 39.5 per­cent of the pop­u­la­tion this year to 34.2 per­cent in 2020.

"Mas­sive mi­gra­tion from

OF ru­ral to ur­ban ar­eas over the past decade helped cover the man­u­fac­tur­ing la­bor shrink­age prob­lem, but it is widely be­lieved that ru­ral sur­plus la­bor younger than 40 is al­ready very limited."

MONEY UN­DER THE MAT­TRESS

China is slowly build­ing up a pen­sion sys­tem, mainly for ur­ban work­ers, and has made com­pul­sory ed­u­ca­tion free, in prin­ci­ple if not al­ways in prac­tice.

The govern­ment is also ex­tend­ing health in­surance and ba­sic health care to fill a vac­uum left when the "iron rice bowl" of cra­dle-to-grave so­cial se­cu­rity for in­dus­trial work­ers was dis­man­tled in the 1990s.

"It's true that peo­ple don't re­ally need to save as much nowa­days be­cause there are cer­tain pro­vi­sions. But it's a habit," said Zhang Weiguo, 48, a for­mer sol­dier who is now a driver. "You can't get the older gen­er­a­tion to change their habits."

SEC­OND-CLASS CIT­I­ZENS

For all its or­di­nar­i­ness, Yan­qing is the sort of place that is des­tined to flour­ish if the Party suc­ceeds with an­other of the fun­da­men­tal re­forms it has pro­claimed-al­low­ing mi­grant work­ers from the coun­try­side to set­tle with their fam­i­lies in smaller towns.

Mi­grants with a ru­ral cer­tifi­cate of res­i­dence, or "hukou," who move to a city to work, find it hard to get ac­cess to health, ed­u­ca­tion and wel­fare ser­vices.

"I can't af­ford to bring my two kids to Bei­jing, and no school in Bei­jing will ad­mit them in any case," said Wang, the car­pen­ter-turned-food ped­dler from He­nan.

If mi­grant work­ers like him could put down roots with­out fac­ing such dis­crim­i­na­tion, they would in the­ory save less and spend more on ev­ery­thing from sub­ways to noo­dle shop­sla­bor-in­ten­sive ser­vices that do not add to the trade sur­plus.

As it is, Wang said he and his wife still man­age to save 20,000 yuan a year. "If I spend the money, who would pay the school fees for my kids and who would take care of us when we be­come ill?" But once he's saved 100,000 yuan, Wang wants to go back home and start a busi­ness. -PB News

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