China's unbalanced economic
engine By Zhou Jiangong
SHANGHAI - Investments, consumption and
exports are the troika pulling along China's
economy. But for a long time, growth in domestic
consumption has lagged far behind the other two,
so much so that it is said the troika consists of
two strong horses and a weak donkey (consumption),
resulting in so-called "unbalanced development".
The latest economic statistics released by
the National Bureau of Statistics (NBS) on
Thursday show the problem is, if not worse,
far
from being solved.
The red-hot Chinese
economy in the first half of this year belied
virtually all economists' and analysts'
projections. The NBS's figures gauging the
country's economic performance were: 11.5% growth
rate, 3.2% consumer price index (CPI), US$112.5
billion trade surplus, and more than $1.33
trillion in foreign-exchange reserves.
NBS
officials labeled the economic situation as
"stable and fairly fast" and were reluctant to use
the word "overheating" or to acknowledge the
obvious failure of the government's efforts to
cool the economy down. However, it is expected
that the government will have to take harsher
macroeconomic-control measures, including hiking
interest rates. The CPI jumped 4.4% in June and
inflation is looming.
In the short term,
"excesses" has been the buzzword in describing the
economic situation in 2007. The Committee for
Financial and Economic Affairs of the National
People's Congress (NPC), China's top legislature,
is deeply worried by three excesses: excessive
investment, excessive exports, and excessive bank
lending.
In the long run, however, the
unbalanced economic troika remains the central
government's migraine headache. The exports and
investments are so strong and consumption so weak
that the troika is in danger of someday tumbling
over.
The Beijing decision-makers are
clearly aware of the problem. Besides the exciting
CPI, growth-rate and trade-surplus numbers, the
NBS also made a point of highlighting statistics
such as growth of household income and - in an
unlikely leap - consumption.
Average urban
household income increased by 14.2% and rural
household income by 13.3% in January-June, faster
than the growth in gross domestic product (GDP).
"Both urban and rural residents enjoy an income
growth rarely seen in many years," the NBS
spokesman commented. The government optimistically
predicted that the trend will continue for an
unspecified number of consecutive years.
And the retail consumer goods index
increased by 15.4% in the first half, 2.1
percentage points faster than last year and the
highest since 1997. Seizing on the numbers,
government officials tended to jump to the
conclusion that consumption will catch up with the
investment figures and soon pull its weight.
However, consensus among economists and
analysts inside and outside China is that Chinese
people save too much and spend too little. Thus
the country must continue investing and exporting,
though China's internal imbalance has caused a
global trade imbalance. So the logic says that if
China boosts its domestic consumption with its
rising household incomes, the internal imbalance
will be addressed and the global economy will be
in better balance.
But this logic is not
complete, since it has not included a parameter
that fundamentally defines China's economy: the
increasingly unequal distribution of wealth.
Because of this, increases in the average
household income and domestic consumption remain
uncertain compared with the predictably robust
growth of investments and exports.
Here is
the true story behind the figures on a
household-income increase. Of the total national
income, household-income growth has lagged far
behind the ever fatter government and enterprise
(both state-owned and private) wallets. And for
the past decade, the share of workers' salaries in
the country's GDP has declined, from 15% in the
mid-1990s to about 11% in 2006.
Nominally,
the total income of workers has increased by 15%
annually since 1993. But the government's revenue
and its enterprises' profits increased much
faster. Government revenue has increased by an
average annual rate of 20% since 1993, doubling
the GDP growth rate. With extra-budgetary income
added, the government pocketed more than 30% of
the national income.
While
household-income growth appears to be picking up,
growth of government revenue has been accelerating
faster. From 2002 to 2006, government revenue more
than doubled from 1.9 trillion yuan ($251 billion)
to 3.9 trillion yuan. And in the first five months
of this year, the government had already reaped
2.17 trillion yuan in revenue, with a year-on-year
growth rate of 30.6%.
Although Beijing
does not have credible statistics for enterprise
income, the Enterprise Boom Index, based on
operating income and profits, has put the growth
at 130-150% in recent years. For the first five
months of this year, Chinese enterprise profits
increased by 42%. According to the World Bank, in
the first half of 2006 profits of Chinese
state-owned and private enterprises both increased
by 28%.
It is noteworthy that the majority
of the enterprise profits were in enormous
state-owned monopolies such as energy,
telecommunications, hydropower, resources and
tobacco. In 2005, the 40 largest state companies
accounted for 60% of the total profits of all
state-owned enterprises (SOEs) and one-third of
the total profits of all enterprises in the
country.
Since enterprises use most of
their profits to reinvest, and the government -
slow and inefficient in making social-security and
benefit payments - is likewise high on investing,
it is no wonder that investment figures grow so
quickly.
Even "average figures" can
disguise the truth. Some analysts estimate that
incomes of workers in China's 12 largest SOEs -
including salaries, bonuses, pension packages, and
intangible allowances and benefits - could be 10
times as much as those of their peers in lesser
SOEs.
The NBS statistics for household
income are also selective. They only include
zhigong, the workers formally employed with
full benefits and welfare. They are far better off
than rural migrant workers, who account for almost
half of China's labor army and are not included in
the state statistics.
According to Gu Yan,
an economist with a state-sponsored research
project on income inequality, the widening
inequality and excessive investment and exports
are feeding on each other: China's wealthy
minority is getting richer but has more desire to
invest than to spend. The poorer people, including
a segment of the middle class with fewer
opportunities to move up the economic ladder but
with a stronger desire to consume, are unable to
do their part to help consumption figures catch up
with investments and exports.
At a recent
hearing of the NPC's Committee for Financial and
Economic Affairs, top lawmakers pointed out,
correctly, to government officials that the three
excesses can be attributed to the "problematic
distribution of national income".
Zhou Jiangong is a
Shanghai-based analyst on China's economic,
political and foreign affairs.
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