How to convert the consumption potential into actual consumption is an urgent challenge for the Chinese Government
China’s consumption level is far below that of many other countries, but rising incomes may help to narrow the gap
According to figures released by the National Bureau of Statistics of China (NBS), in the first half of 2006, fixed-asset investment stood at 4.24 trillion yuan, surging 29.8 percent year on year, 4.4 percentage points higher than the rate in the same period last year. During this period, the total volume of exports and imports reached $795.74 billion, up 23.4 percent over a year ago, 0.2 percentage points higher than the growth rate in the same period last year. At the same time, retail sales of consumer goods totaled 3.64 trillion yuan, up 13.3 percent year on year, or a real growth of 12.4 percent when allowing for price rises, 0.4 percentage points higher than the growth rate a year ago.
Among the three major factors driving Chinese economic growth, fixed-asset investment and foreign trade played the leading role. Compared with the situation in developed countries where consumption accounts for more than 70 percent of the GDP, the Chinese consumption level is still low.
However, Song Guoqing, Professor at the China Center for Economic Research of Peking University, said that the Chinese consumption capability is not fully reflected in the data.
High potential
According to statistics released by the People’s Bank of China, the country’s central bank, Chinese households have 14 trillion yuan of deposits in banks. “If these deposits were put into consumption, Chinese consumption capability would be at least three times the present level,” said Song.
In Song’s opinion, although the income of Chinese residents has increased in the last couple of years, they still feel insecure about their future life because the social security network is not effective. They are worrying about job security, old age security and future security. Owing to these factors, specifically unemployment, housing, pension, health care and education, people are not willing to spend much despite the fact that their incomes are increasing.
Yao Jingyuan, Chief Economist of the NBS, believes that the Chinese people’s consumption potential is huge and this kind of potential has been underestimated over a long period.
The Chinese owned 10,000 cell phones in 1998, and it was estimated at that time that cell phone users would reach 800,000 by 2000. However, in 2000 more than 87 million cell phones were in use, 100 times the expected figure. In 2005, there were 390 million cell phones in use in China, largely surpassing the figure estimated by the government, Yao said.
At present, among the 39 major industrial sectors in China, electronic telecommunication equipment manufacturing, with cell phones as the core, ranks first, instead of the iron and steel industry. It is thus evident that the increase of China’s consumption capability is unforeseeable.
These were opinions Yao expressed at a conference held by the business community in Zhejiang Province in June. According to Yao’s suggestion, corporations should attach importance to researching on people’s consumption behavior, for in the next five years, industries adaptable to the upgrading of consumption structures will be the new hot spots for investment.
Unbalanced income distribution
“The unbalanced distribution structure of national income has sapped the driving force needed for an increase in consumption,” said Xu Lin, researcher at the Pacific Securities Co., Ltd. Although the potential for consumption is great in China, the increase in consumption will be mild, because this consumption is restricted by the distribution structure of national income, Xu added.
According to Xu, the unbalanced distribution structure of national income is reflected in two aspects: The rapid increase of fiscal revenue has created a gap with an increase in income, and the internal distribution of wealth is not balanced among employees.
Since 1998, fiscal revenue has increased at an annual rate of 20 percent, and in 2005, fiscal revenue reached 3.16 trillion yuan, accounting for 17.4 percent of the GDP, Xu said.
When government revenue increased, the proportion of corporate income to GDP remained at about 14 percent. That is to say, the rapid increase of government income squeezed the increase of individual income, so that the real growth of the latter is lower than that of the GDP in many years.
More importantly, the distribution of individual income, which grew comparatively less, is not balanced. The income gap between urban and rural residents is larger. Urban residents, accounting for 40 percent of the national population, earn nearly 70 percent of the money, while the 60 percent of people living in rural areas are left with only 30 percent of the country’s income. On the other hand, the gap between high-income and low-income groups is also widening.
“This phenomenon constrains people’s desire to spend, and further blocks the impro-vement of consumption levels,” Xu said.
Jiang Dezeng, researcher at the Pacific Securities Co., Ltd., believes that the investment-oriented economic growth is the root cause of the imbalanced income distribution structure.
According to him, the present public servant assessment mechanism stimulates government officials to focus on increasing the local GDP. However, among the three major driving forces of GDP, consumption growth mainly depends on individuals, and foreign trade growth on foreign consumers and domestic enterprises. It is difficult for local governments to influence these two aspects. However, they can push GDP growth through investment, which has resulted in the rapid increase in investment.
The economic development in recent years shows that investment in the real estate sector is the engine of this round of economic growth and, at the same time, makes it possible for the government to earn more. Now, land, the core element of real estate development, is still controlled by local governments, which have obtained huge income by land sales.
“Driving economic development by investment has brought fast growth of government income, but did not increase individual income accordingly,” Jiang said.
In the late 1990s, the Chinese Government launched reforms of health care, educational and housing systems, with expenses in these fields, which had been formerly covered by the government, now paid by individuals. Considering possible expenses on health care, pensions, education and so on, people save more but spend less.
Yi Xianrong, Professor at the Chinese Academy of Social Sciences, expressed the same ideas, indicating that in recent years, the growth of fiscal revenue has been twice that of GDP and that a large amount of the revenue has been put into the reform of state-owned enterprises. This is another reason for the low increase of individual income.
Three consumption classes
According to a report released by the NBS National Conditions Research Society, based on a survey among 5,126 consumers in 10 large Chinese cities, the country has three consumption classes. The first class represents high-income earners with annual income exceeding 80,000 yuan. Money is not a problem for them, and they only need to consider where to spend their money. The second class is composed of urban wage earners who are experiencing the transition from quantity- to quality-oriented consumption. The last class is the low-income group who, living a poor life, want to buy but have no money to spend.
The population of the first class accounts for 15 percent of the total population and that of the second class accounts for 80 percent, constituting the mainstream of Chinese consumers.
According to Zhang Zhongliang, Secretary General of the China National Research Association, the high-income class is trying to keep up with the international middle class level and playing a demonstration and leading role in connecting the level and characteristics of domestic consumption with those of international consumption. Fashion, brand, quality, style, popularity, characteristics and dignity are the major factors influencing the consumption of this class.
To the second class with medium income, housing, education and travel are the themes of consumption.
In Zhang’s opinion, the first class may illustrate the future, but in China, it is the second class that represents the present trend. They are the majority of the population and their consumption is actually the most authentic depiction of China today.
Obviously, there are different consumption demands, capabilities and desires in China, just as in many other countries. On the one hand, consumption of luxuries is overheated in some developed areas with high income; on the other hand, poor people and those living in underdeveloped areas cannot afford more than basic food and clothing. The majority is in the second class, who can consider luxurious consumption only after meeting basic demands in such fields as education and housing.
More income, more consumption
China is now carrying out reform of its national income distribution structure, with the aim of reducing the gap between the rich and the poor and increasing individual income.
According to Jiang of Pacific Securities, the major objective of the reform is to increase the income of low- and medium-income groups.
The gap between the rich and the poor exists in all countries. Since it is unchangeable now, it is obviously practicable to raise the income of low- and medium-income groups to let them spend more. The increase of individual income will also help transfer the stockpiled consumption potential into consumption capability, which is urgent to China.
Since the 1990s, the Chinese Govern-ment has been trying to expand domestic demand and increase domestic consumption proportionately, which has achieved marked effects.
The reform of the national income distribution structure also strives to increase the income of the low-income group, gradually increase the proportion of the medium-income group, and effectively regulate the extremely high income. Measures include strictly implementing a minimum salary mechanism, gradually increasing the minimum salary, providing more employment opportunities and improving the existing social security system.
As of July 1, China raised the salaries of public servants working for the central and local governments. This reform gives preferential treatment to those working at the grass-roots level and remote areas. Of the 6 million public servants in China, 60 percent work in county-level governments and 92 percent are of low rank.
Moreover, the Chinese Government has largely increased subsidies to low-income urban residents, from 800 million yuan covering 4 million people in 2000 to 11.2 billion yuan covering 22 million people in 2005. The Chinese Government also decided to raise the average per-capita subsidy to low-income people in 2006.
In Jiang’s opinion, with the government’s effort to increase investment in the public sector, to improve various security systems and to adjust the income distribution structure, the people’s enthusiasm to spend will be aroused. This will help tap residents’ consumption potential, speed up the nation’s consumption capability and transform the current investment-oriented economic growth pattern.