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The
Chinese government’s efforts to steer the economy away
from exports and investments and toward more vigorous
domestic consumption are clearly not working.
The
share of consumption in the Chinese economy probably
slumped to 36 percent in 2007, the lowest in 20 years,
state-run Xinhua News Agency reported last week, citing
research by the State Academy of Social Sciences in
Beijing.
The main
culprit was soaring home prices, the report said.
No
doubt, housing is getting more expensive.
An
official index of new and second-hand home prices across
70 Chinese cities recorded a 10.5-percent gain from a
year earlier in November, the fastest on record.
But if
property prices are going up, so are incomes.
Besides,
even with rising borrowing costs, real interest rates in
China are negative. Why would anyone want to curtail
consumption to buy a house, earning 4.14 percent on the
money kept in his savings account, when the annual
inflation rate in November was 6.9 percent? Wouldn’t a
more rational strategy be to take out a mortgage?
“When
trend income growth is high, households seeking to
smooth their consumption should borrow against future
income, especially if real interest rates are low,”
Marcos Chamon, an economist at the International
Monetary Fund (IMF), and Eswar Prasad, an economics
professor at Cornell University, noted in a recent study
on the rising savings rates of China’s urban households.
Weak
credit
Only 5
percent of
China’s
households had any mortgage debt in 2005, the
researchers said. “Tracing cohorts over time indicates a
virtual absence of consumption smoothing over the life
cycle,” Chamon and Prasad said.
The
problem of financial underdevelopment isn’t restricted
to home loans. Since credit checks are perfunctory,
cards come with low spending limits and have lukewarm
acceptance. Auto finance is still in its infancy. A
survey conducted in April last year by consulting firm
KPMG Llp. and Taylor Nelson Sofres Plc., a market
researcher, showed that while 25 percent of car buyers
in China had access to finance, few actually opted for
it.
Expansion in consumer credit accounted for only 2.6
percent of the household expenditure in China in 2006
compared with 25 percent in India, Michael Kurtz, an
equity strategist at Bear Stearns Ltd. in
Hong Kong, wrote in a December 14 note to investors.
Boosting
consumption, slashing the politically sensitive trade
surplus, containing the growth of polluting industries,
increasing public expenditure in rural areas and lifting
incomes of low-income citizens are all part of China’s
strategy to boost the quality of the nation’s economic
growth.
Several
explanations
The
share of private consumption in China’s gross domestic
product (GDP), as Morgan Stanley economist Stephen Roach
noted last year, was probably the lowest of any major
economy in modern history. Economists have given many
reasons for this.
First,
the Chinese have a strong precautionary motivation to
save. State enterprises, which used to provide many
subsidized services to their employees and their
families, have withdrawn those benefits as part of their
“reform.” That has shattered the safety net—especially
in education, health care and old-age security—because
workers are now more prone to save their incomes than
before.
Consumption may also have been hobbled by too much
profit being made at the expense of the worker. The
share of wages in the Chinese economy fell to 41 percent
of GDP in 2005 from 53 percent in 1998, according to the
World Bank.
“If
China is to rebalance growth toward greater dependence
on household consumption, improving the distribution of
national income between profit and household income
appears to be a quantitatively important factor,” IMF
economists Jahangir Aziz and Li Cui noted in a July
paper.
Demographics, money, culture
There
are other forces, too, at work.
A
preponderance of working-age population may have played
a part in boosting the savings rate to about half of
GDP.
Or
perhaps the real reason is monetary.
To keep
the yuan from appreciating against the US dollar, the
Chinese central bank has suppressed the growth in base
money.
That has
forced individuals—who have little leeway to tap foreign
capital—to save more, says Michael Mussa, a senior
fellow at the Peterson Institute for International
Economics in
Washington.
Yet
another explanation is cultural. Confucius, the
philosopher, had advised the Chinese in 500 B.C. to
accumulate wealth by thrift. “Let the producers be many
and the consumers few,” he had said.
That
teaching is more appropriate for the free-spending
American consumer. The Chinese could do with a little
less production and a little more consumption.
While
the bulk of
China’s
high national savings rate is on account of its
state-owned enterprises, household consumption is
undeniably low. The exact cause of that may be difficult
to pinpoint. But, among other things, it must be the
government’s endeavor to bolster consumer credit.
Officials in Beijing miss no opportunity to say that
they accord the highest priority to the task of economic
rebalancing.
But with
the share of consumption in GDP continuing to decline,
it’s quite evident that the gap between rhetoric and
reality is vast and won’t be bridged soon. |
