Consumption: economic challenge for China’s new leadership

This is a year of major political moves all over the world. After the much-awaited US elections, the Chinese 18th National Congress has selected the new line of leaders, with Xi Jinping leading the seven-member standing committee.
Spearheading the world’s most populous country and the second-largest economy is not an easy feat, and the new set of leaders face a gigantic economic challenge for the next five years and more – that of putting Chinese economic growth on a sustainable path.
Until now, the Chinese economy has grown at the heels of exports and investment, infrastructural investment to be precise. However, with a low consumption rate, economic growth based on investment and exports alone is not sustainable.
Therefore, boosting consumption is, indeed, ‘the’ most pressing economic challenge facing Jinping’s and his team.
It’s not as if China had not attempted to tackle this economic predicament earlier. Since the mid-1990s, greater emphasis on higher education had been placed in hopes of spurring consumption as more educated individuals will attempt to improve their quality of life and hence give some consumption-based economic boost.
Unfortunately, the approach backfired because of households started increasing savings in order to afford tertiary education for their children.
Similarly, attempts to stimulate consumption by greater commercialization of the housing market did not bear fruit because of similar reasons; households began to shift towards greater savings to save for a place to live in.
So what is the policy prescription for the economy where increasing consumption is turning out to be a major challenge?
According to Li Gan, Director of the China Household Finance Survey at Southwestern University of Finance and Economics in China, eliminating the rich-poor gap in the country may be quite effective.
China’s income gini coefficient, according to the 2011 Human Development Indicators, is worse than that of some low human development countries such as Bangladesh and even Pakistan (China: 41.5, Pakistan: 32.7, Bangladesh: 31.0).
“The rich hold the vast majority of Chinese savings. The top 10 percent of households have 69 percent of the total savings…conversely, about half of the Chinese households surveyed have negligible savings…The low savings rate of most Chinese households surveyed suggest they simply don’t have the money to spend. To move toward a consumer-based economy, therefore, raising the income - and spending — levels for the poor is key,” explains Li Gan in an opinion piece for CNN.
He goes on to suggest the core ingredient for this recipe of consumption growth – an increase in government spending towards social welfare. This seems apt considering that social welfare programmes had a mere three percent share in public spending over the last decade.
Public expenditure in areas such as insurance for poor households and unemployment benefits will mean the populace will not succumb to saving for retirement and medical emergencies.
At the same time, some analysts prescribe freeing up the tightly-controlled financial system as another means of boosting consumption.
All in all, the matter continues to be of serious concern for the new set of policymakers. It’s been a while since the media watchdogs have been calling for this economic about-turn as far as the foundation of Chinese economic growth is concerned, and it’s time to tackle the issue from some different angles.