WASHINGTON—One pillar of the Chinese Communist Party’s (CCP’s) legitimacy has been a growing economy, but strong growth is no longer enough. The CCP’s leaders now recognize that China’s export-driven economy needs to become more consumer oriented, but they may lack the will needed to make the necessary changes.
“The Chinese economy is at a crucial threshold,” said Dr. Christopher A. McNally, the director of the China-U.S. Relations Program at the University of Hawaii-Hilo. McNally spoke at the East-West Center in Washington, on April 12. The leadership has decided “they have to do it now or otherwise it will have big problems down the road.”
“Without effective measures to rebalance the economy, the legitimacy of the CCP is in jeopardy,” said McNally via e-mail. It will not be easy for the Communist Party to implement the new policies, but they need to make the changes to enable the Party to survive, he said.
The idea of rebalancing the economy so that the economic growth path is directed to expanding the consumer sector has been around for six or seven years among the leadership, said McNally. Nicholas Lardy, senior fellow at the Peterson Institute for International Economics wrote about it back in 2006.
But currently there is a “distinct seriousness about rebalancing and moving China toward a domestic consumption-based growth pattern,” said McNally, whose research focuses on the nature and logic of Sino-capitalism. The 12th Five-Year Plan (2011–2015) and several recent policy measures have provided “a new policy framework to address these imbalances,” McNally said.
But economist Dr. Tianlun Jian said in an interview with the Epoch Times that while China has been talking about increasing the consumption share of Gross Domestic Production (GDP) in recent years, “it has only been declining.” Due to China’s macroeconomic policies, it has declined to about 35 percent.
The policy, for example, of the undervaluation of the currency to promote exports, “drives down domestic residents’ income and widens income inequality across regions and between the rich and the poor.” Other policies that are promoting growth and investment keep driving down the share that the domestic consumption contributes to GDP.
The Chinese government would have to “change the fundamental economic structure and policies that have driven its growth,” said Jian, who formerly worked at the People’s Bank of China (PBOC).
McNally agreed that the regime is not about to do that. “I know the Chinese [communist leaders] are not thinking of changing the basic tenets of its financial system.” They are taking a different route, he said. Whether the Chinese would have to liberalize the financial sector—stronger market forces, deregulation, and strengthening of the service sector—to create a consumption-oriented economy, McNally did not know.
Paying for Social Welfare Services
On paper, China’s centralized economy should generate a huge amount of cash that could be invested into social services such as health care, unemployment, and disability pensions.
China’s centralized economy centers around state owned enterprises (SOEs) in many key sectors of the economy. “The state has been paying dividends to public shareholders but not to the state,” a policy that is changing, explained McNally. Beginning in 2008, most profitable enterprises were required to give 10 percent of profits and in 2011 this jumped to 15 percent.
However, the key is implementation. “So far, we don’t have any information how much of that money has actually been collected from the Minister of Finance,” said McNally.
Jian is skeptical that the Chinese government can balance the economy by taxing state-owned enterprises’ profits and transferring the money to the people. “Yes, it will help improve people’s income, but only marginally. If exports and investments are set to grow at more than 20 percent rates, consumption share is bound to decline even further [as it has in past years], given that growth rates of wages and salaries are much lower than exports and investments.”
Also, it is important to bear in mind, says Jian, that “all SOE’s profits in 2010 accounted for only 31 percent of the industrial profits for the country. It is a small portion in GDP growth, compared to huge exports and investments.”
Dr. John Lee, a visiting fellow at the Center for Independent Studies at the Hudson Institute, says in an article on why the Party needs to loosen its grip, that China has not adopted a consumption-driven model because the state favors the 120,000 SOEs over 5 million private companies and 45 million informal private businesses.
“While SOE revenues have been growing at 15–20 percent annually, mean household incomes have been expanding at a paltry 1–3 percent over the past decade. It is no wonder that domestic consumption is languishing at around 30 percent of GDP—the smallest percentage for any major economy in the world,” said Lee.
But the SOE is the basis of how the CCP maintains its economic dominance and relevance at the grass-roots level, creating business opportunities for the economic and social elite, he writes. The CCP can’t very well undermine a system that is producing the Party’s strongest supporters.
Read More…Regulations Not Enforced