China’s Stimulus Package: Encouraging Private Consumption (Part III)


In a recent CNN interview, I was asked why the Chinese have such a high savings rate, leading to the obvious follow-up question as to whether the Chinese government will be able to change saving habits and encourage more consumption to stimulate its economy.


I explained that there are several underlying reasons for China’s high savings rate, and to the extent that the government can begin addressing these issues, consumption habits of Chinese consumers will change— over time.


First, ordinary Chinese citizens have not had the benefit historically of a social safety net and have learned to rely on themselves and their immediate families in the event of family emergencies. Under these circumstances, savings become a family’s de facto safety net.


Second, despite the tremendous economic progress that China has made over the past 30 years, the Chinese are very financially conservative because they remain uncertain about what tomorrow might bring. Those who are 40 years of age and older remember all too well the Cultural Revolution and the other unpredictable, sharp turns which the government has made in the past. It will take a generation or so of consistency for these memories to fade.


Finally, the financial services industry is in its infancy in China. For better or for worse, it has not been as easy for Chinese consumers as it has been for their American counterparts to borrow money for household purchases. When “innovations” like personal home mortgages have been introduced into China, Chinese consumers have shown that they are more than willing to use them to expand their purchasing power.


In her Wall Street Journal article, China’s Stimulus Will Work,  Calla Wiemer, a visiting scholar at the University of California-Los Angeles Center for Chinese Studies, gave a fourth reason: a very high rate of GDP growth. According to Ms. Wiemer, “A rapid increase in saving rates is common among developing countries in their growth take-offs.” In 2007, China’s national saving rate reached 51.2 percent of GDP, up 13.5 percentage points from the 37.7 percent rate in 2000. As MTD readers know, China’s economy grew at double-digit rates during much of this period.

While growth has been the main driver of the significant increase in China’s savings rate in recent years, Ms. Wiemer acknowledges that “growth is not the only factor influencing saving, and even with growth sustained at a goodly pace there are many avenues for government policy to alter the saving versus consumption choice.” That gets us back to the core reasons for China’s high savings rate, and begs the question as to what the stimulus package will do to address the key concerns of individuals and businesses to stimulate demand in the private sector.

There are basically two ways to encourage private consumption. The first is to encourage Chinese consumers to buy more television sets, washing machines and passenger cars. The second is to encourage private companies, as opposed to government agencies, state-owned enterprises and other extensions of the government, to make investments, expand their businesses and sell more products. Ms. Wiemer points out that at the same time that China’s savings rate soared to 51.2 percent of the country’s GDP, its “investment rate flattened out at around 43 percent of GDP from 2004 onward.” In addition to stimulating consumer purchases, the government must also stimulate private investment. Both increase private consumption above and beyond what the government can do through its fiscal policies.

In MTD’s first article on China’s Stimulus Package we listed the 10 areas where China intends to spend the 4 trillion yuan. In order to assess the potential impact of this spending, it’s useful to re-categorize those areas according to whether they 1) address the Chinese consumer’s safety net and economic uncertainty issues; 2) encourage further investment by private businesses; or 3) increase government spending.

Consumer Safety Net and Economic Uncertainty Concerns:

·         Housing: Building more affordable and low-rent housing.


·         Health and education: Beefing up the health and medical service by improving the grass roots medical system.


·         Incomes: Raising average incomes in rural and urban areas. Raising next year’s minimum grain purchase and farm subsidies. Increasing subsidies for low-income urban residents. Increasing pension funds for enterprise employees and allowances for those receiving special services.


·         Disaster rebuilding: Speeding reconstruction in the areas hit by the May 12 earthquake.


Encouraging Investment By Private Companies:


·         Industry: Enhancing innovation and industrial restructuring and supporting the development of the high-tech and service industries.


·         Taxes: Extending reforms in value-added tax rules to all industries, which could cut the tax corporate burden by 120 billion yuan (about 17.6 billion U.S. dollars). Technological upgrading (i.e. equipment purchases) will be encouraged.


·         Finance: Enhancing financial support to maintain economic growth. Removing loan quotas on commercial lenders. Appropriately increasing bank credit for priority projects, rural areas, smaller enterprises, technical innovation and industrial rationalization through mergers and acquisitions.


Government Infrastructure Spending:


·         Rural infrastructure: Speeding up rural infrastructure construction. Roads and power grids in the countryside will be improved, and efforts will be stepped up to spread the use of methane and to ensure drinking water safety. Risky reservoirs will be reinforced. Water conservation in large-scale irrigation areas will be strengthened. Poverty relief efforts will be increased.


·         Transportation: Accelerating the expansion of the transport network.


(See China’s Stimulus Package: Increased Money for Railways (Part II) 


·          Environment: Improving environmental protection by enhancing the construction of sewage and rubbish treatment facilities and preventing water pollution in key areas.


Obviously, there is considerable overlap among the various categories. For example, I could have classified “Disaster rebuilding” under “Government Infrastructure Spending,” but because this spending is targeted at the poorest areas of the country, I believe it addresses the very real economic concerns of China’s rural population. In fact, economic support for the rural and low income segments of China’s population is the one theme that is present throughout the ten areas.

For these reasons and more, Ms. Wiemer is very positive on the package that China has put together. In her words, “If China is going to ‘rescue the world’ from economic crisis, this kind of stimulus package is the way to do it.” I share her optimism—as do others in China apparently. The Shanghai Index has been up all week since the package was announced.

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