You Nuo

Rising crisis of non-emerging consumers

By You Nuo (China Daily)
Updated: 2009-12-29 07:52

Contrary to what many Chinese columnists say, the real challenge facing the economy is not how to make consumers spend more, but how to make consumers in the first place.

With the government's $586-billion stimulus package gradually running out - it was announced more than one year ago - there will have to be new, alternative forces to drive the economy's continuous growth, even though Beijing has promised to pump more funds into the economy next year.

The economy would have looked healthier had it depended more on consumer spending, or what economists call consumption, rather than on government-led investment in public projects. Even Premier Wen Jiabao acknowledged this in his interview with the Xinhua News Agency last week.

But low consumption (low in terms of its share in total GDP) has been a chronic symptom of this economy. Recognizing it is easy. But treating it is hard. And until now, China hasn't found the magic pill.

Economists say that from 2003 to 2008, as investment contributed an average 42-plus percent of GDP, consumption's share was not more than 38 percent, with the rest of the economy being driven by exports. In contrast, in most developed economies, the share of consumption is usually about 70 percent, if not more.

This year's figures, which are yet to be released, are likely to show an even smaller percentage of consumption, considering Beijing's huge stimulus spending.

There are several reasons for the slow progress of consumption. The most salient one is the slow increase, if at all, in individual income. A rather stern fact is that despite the world record growth rate in GDP, the share of household income in the nation's total has actually declined, from 62.1 percent in 2002 to 57.1 percent in 2006.

Economists say that over a longer span of time (1991-2006), when GDP grew at an average 10.2 percent a year, urban per capita disposable income grew only 7.9 percent, and rural per capita net income rose at a meager 4.9 percent.

Presumably, much of the newly generated wealth was collected by the government and used on - apart from paying staff salaries and erecting new office buildings - the many public projects that can be seen everywhere, from the longest cross-sea bridge and the fastest railway to the tallest building.

But just like it has been reported about the new Wuhan-Guangzhou fast trains, the low household income could be holding back many potential passengers from using the ultra-modern, (up to) 390 km/hour trains. How can we expect people to pay 700 yuan for traveling first class and 500 yuan for second class when the their average income is still low?

One has reason to fear that China may end up as an emerging market economy without emerging consumers if no effective efforts are made to balance such a lop-sided development model and if the government keeps pouring in money into one expensive public project after another while consumers do not have enough money to pay for new products and services. That would be a truly deplorable situation.

Admittedly, there is nothing wrong with the government leading all the key civil projects and social programs, just like there is nothing wrong for it to tax people one way or the other to raise funds in order to modernize various public services.

But those things should not be done single-handedly by just one or a few government agencies. Planning officials will have to ask themselves who will be their future users and how will they be able to afford them. They had better make sure that all the new facilities match up with people's spending power and the freedom for a great number of private companies to provide a variety of small but necessary value-added services.

Soon enough, but after trillions of yuan have been spent on domestic building projects, the government will come to face the real challenge: of making consumers out of its people instead of making the longest, fastest and tallest things.

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(China Daily 12/29/2009 page9)