China agonizes over its fistful
of dollars By Scott Zhou
SHANGHAI - China's President Hu Jintao is
at the apex of his power and influence at home and
abroad. He has the vision of a "harmonious
society" and China has never had more money with
which to make Hu's promise a reality. But if a
change is going to come, and Hu is ready to put
his yuan where his mouth is during the next five
years - how to spend it more efficiently is the
question.
He will need to enhance his
crackdown on official corruption, to rein in
regionalism and readjust the relationship between the
central government and the
regional ones. All this poses new challenges to Hu
and his new team.
Adeptly consolidating
his power base and tightly "uniting the thoughts
of all party members", Hu declared that the
recently concluded 17th National Chinese Communist
Party congress had successfully addressed the
question of "what banner to uphold and which road
to take". And he is leading a party of 70 million
members apparently ready to march under his banner
of "scientific development" and presiding a
government that is arguably one of the richest in
the world.
When the power banquet is over,
the first thing on Hu's agenda may be how to
deliver on his promise of building a "harmonious
society". In his renewed five-year tenure, Hu has
to unfold a package of social programs that would
cost trillions of yuan and crack the inter-tangled
interest groups that may resist against some of
his reforms.
Indeed, the biggest political
party in the world is swimming in a sea of money.
For years the Chinese government's revenue
has been growing at an accelerating rate. In the
first nine months this year, it reaped more that
3.71 trillion yuan (US$478.7billion) in tax
income, nearly the same amount in the whole year
of 2006. The whopping year-on-year 30.8% growth in
tax income is the highest since 1994, when a tax
system overhaul re-cut the pie of the tax revenue
between the central and provincial governments.
The government, both at the central and
local levels, apparently benefits tremendously
from soaring housing prices by selling land and
levying transaction taxes. In the first three
quarters, tax revenue from housing sales and
property development grew by 32.5% from a year
ago, tax on the use of land increased by 70.2%,
and income from the value-added tax on land
increased by 82.8%. The government also adds on
its book 132.2 billion yuan from taxing stock
trading.
Of hundreds of billions of
extra-budgetary income per year, local governments
pocket 90% of that amount. Although a lion's share
of extra-budgetary fund is from land or real
estate related businesses, localities so far are
reluctant to seriously provide affordable housing
to the urban poor. In fact, many cities, with
soaring land and housing prices, still rebate
proceeds from selling land to developers.
The state-owned China Investment Company,
the sovereign wealth fund with $200 billion
capital in hand, is still scratching its head on
how to invest. The central government, arguably
the richest government and one of the biggest
creditors in the world, is sitting on $1.4
trillion in foreign exchange reserves. Besides
buying US Treasury bonds and investing in
state-owned commercial banks, it has yet to find
better ways to manage the huge yet ever growing
foreign reserves.
Some of the biggest
enterprises owned by the central government are
enjoying the bonanza of monopolizing the most
profitable industries and businesses:
telecommunication, energy, transportation,
resources contraction. Stock prices are rocketing
so high that the "nifty fifty", mostly state-owned
big blue chips, have jumped to become among the
biggest companies in the world in terms of market
capitalization.
So far the market value of
A shares, the yuan-denominated shares floating on
the mainland stock markets, has accounted for 150%
of the country's gross domestic product (GDP). By
the end of 2006, listed companies owned or
controlled by the central government accounted for
more than a quarter of market capitalization on
the mainland bourses. With more giant state-owned
enterprises (SOEs) set to float their shares, the
ratio is bound to be higher.
For years the
State Council, China's cabinet, has considered
selling state holdings in SOEs and using the
proceeds to make up its national pension fund.
This is rumored to be happening soon. And early
next year, the State Council plans to push those
juicy SOEs into paying dividends to its main
holders: the state. It is widely expected the
money could be used to pay for social security.
But the piling up of money could be a
deepening headache for supreme leader Hu and his
team of eight men. The endorsement of these nine
members of the standing committee of the
Politburo, which actually rules the country,
indicates that the party knows where it should
spend the money. But the test will be how to spend
it.
To date, the government has lagged in
spending on a social security system, health care,
education and housing. These programs need to be
funded by trillions of yuan in Hu's second
five-year tenure.
But these programs are
less about the quantity of money than about the
quality of government itself. The missing link is
an efficient government and an honest army of
civil servants.
In this sense, Hu's
emphasis on anti-corruption could not be more
urgent. In carrying out the programs for a
harmonious society on the basis of spending
trillions of yuan, the government has to act as
fiduciary for the people's money in the first
place.
Secondly, the government must have
a more efficient administrative structure. The
current fiscal arrangement between the central
government and local governments has to be
restructured. Provincial governments have long
complained that the fiscal burden has been
downloaded to them, with tax revenues going into
the central government's coffers.
For
education and health care, the central government
is willing to put money up front for localities to
match funds. For example, in August, the State
Council decided to promote a pilot project in 79
cities to expand the coverage of basic urban
health insurance to employees' family members. But
so far the local governments have not shown any
sign of supplying matching funds.
Meanwhile, the government has to
coordinate its fiscal policy with its
macro-economic control policies. Spending on a
social security system and other social programs
is also aimed at boosting consumption and
discouraging savings.
On this account,
policymakers in Beijing and in Washington agree
that to address economic imbalances, China has to
strengthen the role of domestic demand in
propelling growth. In fact, Hu has set the goal
for China to "increase its domestic market share
in the world market".
For Hu, indeed, how
to increase spending while continuing to create
wealth needs a new approach which calls for a very
different management style from his predecessors.
Scott Zhou is a Shanghai-base
analysts on China's politics, economy and
international relations.
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