Spreading the prosperity - China's new balancing act

There had been fears that this major engine of global growth would falter.

Even so, there are still concerns about the Chinese economy. Although China’s official PMI (Purchasing Manufacturers Index) improved from 51.0 per cent in February to 53.1 per cent in March, another PMI index showed a fall in production, due to weak domestic and foreign demand. One reason for the discrepancy is that the second index measures small and medium sized enterprises, whereas the official data samples large ones.

By either measure, the Chinese economy is slowing down. The government forecasts that the economic growth rate this year will fall to an eight-year low of 7.2 per cent. The situation is mainly due to declining exports caused by the global economic slowdown so to generate more growth the Chinese government is trying to stimulate domestic demand. In his annual work report to China’s annual parliamentary session in March, Premier Wen Jiabao said his first priority for the current year would be expanding consumer demand. As a preliminary move he said the government would work on relieving price pressures and rebalancing the national economy. Other policies would include increasing the incomes of low and middle income groups and enhancing people’s ability to consume. 

Stimulating domestic consumption to pick up the slack will require a reversal of recent trends as domestic consumption’s share of GDP has been falling for several years. Whereas in 2000 this figure was around 50 per cent, by last year this had fallen to around one third.

A number of measures have already been tipped to achieve this. One is to loosen monetary policy by lowering the reserve requirement ratio on bank deposits or by reducing interest rates, as is widely expected by economists. Another measure that has been recently announced is liberalization of the banking system. At the beginning of April Premier Wen Jiabao declared that the government would break up the monopoly of the country’s big state-owned banks. This is intended to help stimulate domestic consumption by encouraging more lending. Since the large banks mainly provide lending to state-owned enterprises, liberalization should help smaller enterprises which still struggle to get finance despite producing the lion’s share of jobs and creating economic growth. 

Other measures that will help stimulate the domestic economy are to provide low-cost housing and to increase incomes; these too are high on the government’s agenda.

With the current leadership in China coming to the end of its term, the over-riding goal of both the outgoing and incoming government is to create an economic balance that reduces reliance on exports (and global instability) and that spreads prosperity more widely and anchors political stability. As Thailand is embarking on a similar journey to stimulate domestic demand and increase incomes, policymakers here will be watching with interest the developments in China.

 

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