BIZCHINA> Insights
In new economy, consumption and capital play key roles
By David Michael (China Daily)
Updated: 2009-09-28 08:59

Construction is likely to resume as the government's fiscal easing policies take hold. In the first three months of this year, Chinese banks loaned more money than they did in all of 2008.

The 4 trillion yuan stimulus package should ripple through the domestic economy over the next several years. Unlike its US counterpart, the Chinese plan is largely devoted to direct investments rather than to transfer payments and tax relief. Fixed-asset investments already increased 30 percent in the first quarter of this year over the same period in 2008.

While it won't happen overnight, Chinese consumers will inevitably start to increase their spending. They currently save 36 percent of their disposable income and hold household deposits totaling $3.5 trillion.

Consumers in China save partly out of concern over healthcare and education costs. But a wave of government reforms will encourage them to spend more freely.

Healthcare reform will steadily expand coverage and access. The government intends to spend $123 billion by 2011 to implement basic universal coverage.

A set of financial services reforms will ease credit availability for individuals and small businesses.

Related readings:
In new economy, consumption and capital play key roles Vice Premier stresses economy restructuring, innovation
In new economy, consumption and capital play key roles Bankers show confidence in economy, banking industry in Q3
In new economy, consumption and capital play key roles China's economy can achieve 8% growth target: official
In new economy, consumption and capital play key roles China's bullish economy climbs spot

Finally, rural land reform will gradually enable farmers to better tap the value of their land.

An underestimated source of strength is China's resilient and flexible workforce. The massive layoffs at export-oriented factories last year captured headlines in the West but obscured the larger story.

China has the highest literacy rate in the developing world. Many workers have quickly adapted to the new reality by accepting lower wages, finding new work and retraining.

A key plank in the stimulus package is the encouragement of inland economic development, which will enable many migrant workers to have more sustainable careers closer to home. One province alone is currently retraining 4 million workers.

The new dynamics will reorder the economic landscape. Large companies and State-owned enterprises will have easier access to credit. Export-oriented companies will struggle to achieve success comparable to that of the recent past.

Companies in rural areas, which will receive a disproportionate share of stimulus spending, are likely beneficiaries, along with healthcare companies.

Government's role

An overlooked aspect of China's stimulus programs is the reshaping of 10 domestic industries - including automobiles, steel, shipbuilding, petrochemicals, electronics, information technology and logistics - that account for 40 percent of GDP. The government is moving well beyond stimulating these industries to active engagement in industrial policy.

The support for these industries is aggressive, even by China's standards. To create greater competitiveness, the government is encouraging consolidation and is offering tax relief, favorable export policies and subsidies for research and development, technology upgrades and pollution reduction.

To stoke demand, subsidies and rebates are available for certain products such as autos and appliances. This rising tide will not lift all boats equally. Some of the interventions are broadly based, but others will benefit particular companies within an industry and not others.

China's new industrial policy has many goals: to move the center of gravity of the industrial base to the west and away from the coast, encourage domestic consumption, accelerate the nation's climb up the economic pyramid and reduce its reliance on foreign technology.


(For more biz stories, please visit Industries)