China aims to prevent unrest by pushing a more 'inclusive' growth

As policemen fan out through cities across China to snuff out the slightest sign of North African-style protests, the country’s political leaders are pledging to tackle the economic problems that might spark popular discontent.

At this week’s annual National People’s Congress (NPC), China’s parliament, speakers from Premier Wen Jiabao on down have been stressing issues such as skyrocketing house prices, worrying inflation, and workers’ wages even above the once-sacred economic growth rate.

While it has so far been “absolutely necessary to make maintaining growth a priority … now we want to put more emphasis on ensuring and improving people’s livelihood,” the country’s top economic planner, Zhang Ping, told reporters last weekend.

This might be easier said than done, some independent economists are warning. “These changes will require a fundamental shift away from China’s current growth model,” says Michael Pettis, professor of finance at Peking University.

Behind the shift in emphasis is a desire to ensure social stability, explains Zhao Xiyun, Deputy Director of the School of Finance at People’s University in Beijing. “That is the single most important thing for the government and the [ruling Communist] party,” he says.

And that stability could be threatened, the authorities worry, if citizens grow dissatisfied with their living standards. “Our work on income distribution, social security, schooling, and medical care still fall considerably short of the demands of the people,” admits the report that the National Development and Reform Commission – the government’s planning ministry – presented this week to the NPC.

The government has often talked in the past about improving the quality of China’s economic growth, and of ensuring a better balance between investment, consumption, and exports – the three engines of that growth.

More often than not, however, local governments have ignored Beijing’s words and “have just sought faster economic growth,” says Professor Zhao.

The NDRC’s report is blunt in this respect. “Local governments…absolutely should not seek rapid growth at all costs or compete for the fastest rate,” it admonishes.

China’s economic growth has averaged 11.2 percent a year over the last Five Year Plan which has just come to an end, Mr. Wen said in his report to the NPC. “But we are keenly aware … that our development is not yet well balanced, coordinated or sustainable,” he cautioned.

A more 'inclusive' growth

He urged measures to make the country’s extraordinary growth more “inclusive,” to ensure that everybody benefits more equitably from China’s ballooning wealth.

Top of the agenda, say planners looking to the next five years, will be policies to increase household incomes and consumer demand, both to improve living standards and to balance the engines driving growth rates.

In a sense, says Zhao, the government has no choice. As US and European markets struggle to recover from the global economic crisis “they are not going to increase their imports from China as fast as they once did,” he points out.

“With less room for increased exports in future, the government has to reorient growth from foreign markets to the domestic markets,” he adds.

At the same time, suggests Arthur Kroeber, head of the Dragonomics economic consultancy, market forces will slowly erode the predominance of investment as a growth driver simply because one day there will be little left to build in China.

“As they get closer to the amount of stuff they actually need, the returns on such investments will fall,” he predicts. “Market forces will start moving in another direction and policies to encourage consumption will have a better chance of being effective.”

How to raise income

But if consumption accounts for just 35 percent of GDP in China (about half the US figure) that is because household incomes are low, and that is no accident, argues Professor Pettis.

Wages have risen more slowly than productivity for the past decade; an undervalued currency has helped exporting manufacturers but made imports more expensive for consumers; and low interest rates have penalized individual savers while helping businesses borrow, Pettis points out.

“To raise consumption you must raise income, but to raise income you should reverse these three policies and they have been what created this growth miracle,” he argues. “It has always been hard for countries to get off investment-driven growth models.”

Nobody is expecting any sudden shifts. By plugging its point about reorienting growth and raising living standards “the government wants to create an atmosphere,” says Zhao. “They are saying now that the main task is to do this, and then they will try to come up with key issues” on which to make concrete policy.

Making such changes, says Mr. Kroeber, will take five to 10 years. “It is still largely at the level of rhetoric,” he says. “They have identified raising household incomes as a major objective … but for the next five years we will see not so much action as policy formation.

“They are a bit more serious than they were,” he adds, “but we won’t see much impact for a while.”