Government efforts to boost consumer spending thwarted by uneven distribution of wealth and inadequate social welfare systems
While it has become a stereotype that Chinese save their money and spend very little, millions of Chinese suffer from the opposite.
Zhou Fugui, who migrated to Beijing several years ago from a destitute rural area, currently operates a vegetable stand and earns a little over 1,000 yuan every month. While this income is three times what he earned as a farmer in his hometown, he still finds it difficult to make ends meet and has had to borrow from people from his home village now also in Beijing. “I earned a little over 10,000 yuan in 2005, but I spent almost 20,000 yuan,” complained Zhou.
Zhou said that he lives a very thrifty life in Beijing. His meals come mainly from the vegetables he cannot sell or off-cuts left behind by customers, and meat is a luxury rarely seen on his table. Zhou spends over 200 yuan on supplementary food items and pays a monthly rent of 230 yuan for his sparsely furnished makeshift house. He picked up a simple gas stove and a secondhand TV set for 100 yuan. TV is the only leisure activity he can afford.
Zhou’s largest expenditure goes to paying for tuition and boarding fees for his son who is in senior high school and the medical treatment for his wife, both of whom live back in his hometown. These two bills cost him 9,000 yuan in 2005.
“I have been selling vegetables for four years in Beijing, and failed to save a cent,” said Zhou with a bitter laugh. “My family budget is increasing and I have to work harder to keep up.”
Compared with Zhou, 28-year-old Wu Xiaofeng is in financial difficulties of a different kind. Holding down a job as a software developer of online games, he has a monthly salary of 6,000 yuan, and is the envy of his peers.
Wu said he spends his salary in advance and has empty pockets at the end of each month. Wu purchased an apartment one year ago and his mortgage payments are 2,300 yuan monthly. He also shells out for daily taxi fees, buying DVDs and enjoying meals and drinks in the more fashionable establishments around town. “Believe it or not, my bank account has a total of 8.6 yuan,” Wu said laughing. He confessed that most of his friends were in the same boat and regularly spent over 80 percent of their income.
However, due to an imperfect social welfare network, the consumption potential of a large proportion of the Chinese population has yet to be unleashed. Compared with Wu Xiaofeng’s free spending attitude, his parents are inclined to put money away for the future. Their financial nightmare would be to be left with no savings in an emergency. Seeing their son spend all his salary, they often warn him of saving money for future contingencies.
Yao Jingyuan, Chief Economist at the National Bureau of Statistics, said that besides income, consumer sentiment, consumption trends and income expectations are all factors that affect how people spend their money. Currently, houses, medical treatment and education are overpriced, exerting a negative impact over consumption, according to Yao.
Mounting savings
In China, many people are in a financial situation similar to that of Zhou and Wu. This group of people either have to live on credit or have a lifestyle where their earnings narrowly match their spending.
Yet despite this growing trend, Chinese banks tell a different story. Deposits of individual savings accounts are increasing and consumer spending remains low.
According to statistics of the People’s Bank of China, the country’s central bank, Chinese residents’ total savings deposits topped 14 trillion yuan at the end of 2005, ranking the second highest in the world. Figures from the National Bureau of Statistics demonstrate that China’s actual consumption rate is only 53 percent, 20 percentage points lower than the average level of industrialized countries, and is dropping.
Wealth gap all pervasive
Some economic experts have blamed China’s low consumption on a lack in consumer confidence.
However, Professor Liu Fuxiang at the University of International Business and Economics holds a different view. He believes most Chinese actually lack money to spend rather than consumer confidence. “Above all, most of the astronomical deposits of 14 trillion yuan belong to the wealthy few, not the ordinary masses,” he said.
Zhang Shixian, researcher at the Institute of Industrial Economics of the Chinese Academy of Social Sciences, agreed with Liu, saying that 80 percent of the country’s savings deposits come from 20 percent of the population. Nearly 60 percent of China’s rural population, amounting to 900 million, have virtually no deposits, he added.
Since the launch of China’s reform and opening-up drive in the late 1970s, a small group of people have managed to amass wealth and become rich, with the gap between the rich and the poor widening annually. The living standards of the majority are still far from well-off, and the 90-million population living below the poverty line of 865 yuan per capita can hardly afford basic medical treatment and their children’s education.
As a result, contradictory facts coexist in China’s consumption pattern: while a major reason behind the low consumption appears to be people’s choice to keep money in their pockets, in reality the large majority of ordinary residents spend most of their income on consumption.
According to Professor Liu, policy makers, however, had downplayed the role of inadequate income in the “high deposit, no spending” conundrum. On this basis, the government launched a series of policies aimed at boosting consumption in the areas of education, health care and housing privatization, as these are of most concern to the public.
Yet after a few years, the gap between the rich and the poor has further deepened. While China’s Gini coefficient (an internationally accepted measurement of income equality) has reached a staggering 0.447, the task of boosting domestic demand has far from been fulfilled. When a country’s Gini coefficient is above 0.4, it means the rich-poor gap is excessively wide.
“This scenario can be attributed to the uneven distribution of social wealth since China’s reform and opening up,” said Fan Gang, Secretary of the China Reform Foundation.
In addition, statistics released by the National Bureau of Statistics show that between January and September of 2005, China’s national income stood at 26.2 billion yuan, but the total retail sales of consumables surpassed 4.5 trillion yuan. Such a contrast indicates that individual buying is not the prime factor of China’s weak consumption.
Low income means low spending
The Chinese Government has been alarmed by this phenomenon for some time. At the annual National Economic Work Conference, which closed on December 1, 2005, the government listed increased public spending as the key to enlarging consumption demand.
The leadership is aware that a major reason behind the sluggish consumption is the low income of the large majority of the population. As a result, instead of the preceding policy of “encouraging people to spend,” the new initiative is to foster consumption by first enriching people through two means. First is to implement overall tax reduction and second is to improve the social security system, so that the populace would not have to save so much hard for their old-age livelihood and medical treatment.
In this regard, the country has abolished the agricultural tax since the beginning of this year and started to exempt all tuition fees for nine-year compulsory education in rural areas. As a new effort to step up farmers’ income, the government hopes to provide 60 percent of the areas with cooperative healthcare this year. Meanwhile, the central treasury will increase the subsidy to farmers participating in the scheme in central and western provinces from 10 yuan to 20 yuan per person.
The government also pledges to raise the standard of subsistence allowances for urban residents and strictly enforce the minimum salary standard in companies according to a package plan to increase residents’ income. In 2006, income distribution would be more inclined to favor low-income earners, who could increase their living expenditures with improved income. The government seeks to address the overcharging in education, medical treatment and telecom services, improve payment policies on real estate and automobiles, tap the potential of personal consumption in entertainment, bodybuilding and tourism, and upgrade the consumption environment by regulating and promoting personal credit.
According to the revised Personal Income Tax Law, the threshold for taxable monthly personal income was raised from 800 yuan to 1,600 yuan beginning January 1, 2006. It will serve as another boost for consumption as the tax burden on wage earners has, to some extent, been alleviated.
What is in store for 2006?
It is acknowledged that investment, consumption and exports are the three principal driving forces of economic growth. But when it comes to China, its growth was mostly driven by the two engines of investment and foreign trade over the past two decades, which has caused a severe imbalance in this respect.
Qi Jingmei with the Economic Forecast Department of the State Information Center predicted that China’s economic growth would slow down in 2006, affected by a stagnant world economy and the government’s macro-control measures. She believes that the growing momentum in investment and exports would inevitably be rebated in a changed domestic and international environment.
The State Information Center said the growth of investment in fixed assets in 2006 is expected to drop 5 percentage points compared with that in 2005. Meanwhile, due to a fall in export growth of 8-9 percentage points from that of 2005 and expanding imports, China’s trade surplus would see a decline.
Under such circumstances, the role of consumption in bolstering economic growth has become vital.
Besides favorable policies, the stimulation of consumption demand has also been stressed in the 11th Five-Year Plan for National Economic and Social Development (2006-10), which includes the initiative to enlarge consumption through boosting residents’ income.
A rough estimation shows that the total retail sales of consumer products are expected to reach 6.88 trillion yuan in 2006, representing a year-on-year increase of 13 percent. Taking inflation into account, the actual increase is around 11.3 percent. It has been estimated that the growth rate in cities will be13.8 percent, the same as 2005, while the growth rate in rural areas will be 11.4 percent, 0.3 percentage points higher than the previous year.
Professor Liu said he basically agrees with this forecast. He also stressed that whether 2006 would see robust growth in consumption hinges on the growing momentum of individual earnings. He estimated that the consumption rate would get a decisive boost if the income growth could top 15 percent.
High Rollers
While economists are trying to explore the reasons behind Chinese residents’ moderate consumption confidence, rich Chinese are squandering money on luxuries worldwide. Travelers from the Chinese mainland are particularly targeted and catered for by some upscale shops in European countries.
China is more and more recognized as the top spot for consumption of world-class luxury items, such as limos, haute couture and brand name liquors, cosmetics and watches.
One noticeable phenomenon is that in China, people born since the end of the 1970s have become the major consumption force of society. The new consumers are the first generation of single children since the implementation of family planning, who are now earning salaries. For this generation, they are more inclined to spend rather than save. They will not only spend the money earned by themselves but also the savings of their parents and grandparents.
Paris-based Prime Peregrine Capital Ltd. recently issued a report confirming that the single children of Chinese families born between 1977 and 1981 reached a total of 90 million. Aged between 25 and 30, they enjoy an income level much higher than their parents at a similar age. This group is also the first generation exposed to a market economy, fashion and popular culture. In comparison, the total population of single children born between 1982 and 1998 is about 320 million. Their living environment is even more affluent than that of the first generation of single children. As a result, they are keener to consume and are extremely brand conscious. It has been estimated by the report that they will become the main consumers in 2008.
In the same report, it is estimated that this group of consumers will drive China’s retail sales to grow 13-14 percent in the next three years on average.