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China Puts Focus on Consumers to Drive Growth

Chinese President Hu Jintao, Vice President Xi Jinping and Premier Wen Jiabao applaud during the opening session of the Chinese National People's Congress (NPC) at the Great Hall of the People in Beijing on March 5, 2013
AFP | Getty Images
Chinese President Hu Jintao, Vice President Xi Jinping and Premier Wen Jiabao applaud during the opening session of the Chinese National People's Congress (NPC) at the Great Hall of the People in Beijing on March 5, 2013

China put its fast-growing consumer class at center-stage as outgoing Premier Wen Jiabao set out a reform plan on Tuesday to spread the fruits of economic growth more evenly in the country of 1.3 billion.

Wen said unleashing the power of China's consumers was vital to the future of the world's second biggest economy and called for accelerated reform of the rigid hukou household registration system to drive an urbanization effort that he said underpinned the country's program of economic development.

"We should unswervingly take expanding domestic demand as our long-term strategy for economic development," Wen told delegates assembled in the Great Hall of the People for the once-a-year meeting of China's National People's Congress (NPC).

"To expand individual consumption, we should enhance people's ability to consume, keep their consumption expectations stable, boost their desire to consume, improve their consumption environment and make economic growth more consumption-driven."

Wen made consumers the cornerstone of an economic strategy designed to deliver an overall growth target of 7.5 percent in 2013 - a level China barely beat in 2012 when growth eased to its slowest pace in 13 years, expanding by 7.8 percent.

Rebalancing growth away from the investment-driven, export-oriented model that has delivered three decades of double digit growth, lifted hundreds of millions of people from rural poverty and turned China into the world's biggest trading economy, has been a policy priority for much of Wen's decade in office.

There are growing concerns that more fixed-asset investment - already worth about 50 percent of GDP and at a level that worries the International Monetary Fund - would simply add to the inefficiency of China's state sector.

Inefficiency in industry exacerbates China's horrific pollution problem, which has its origins in its factory-fueled expansion.

Pollution Problems

The massive environmental cost of China's development was acknowledged repeatedly by Wen.

"The state of the ecological environment affects the level of people's well-being and also posterity and the future of our nation," Wen said.

"We should adhere to the basic state policy of conserving resources and protecting the environment and endeavor to promote green, circular and low-carbon development," he said.

There has been widespread public anger and rare media criticism over pollution in China after choking smog enveloped large swathes of the north of the country recently, grounding flights, forcing people indoors and forcing emergency measures such as factory closures.

(Read More: Pollution 'Worst on Record' in Beijing)

Pollution in Beijing regularly exceeds 500 on an index that measures particulate matter in the air with a diameter of 2.5 micrometers. Above 300 is considered hazardous, while the World Health Organisation recommends a daily level of no more than 20.

Wen linked the successful delivery of policies on consumers, food safety, pollution, healthcare, education, corruption and financial reform to the Communist Party's right to rule.

"We need to improve the socialist market economy," Wen said.

"Reform and opening up are the fundamental force that drives China's development and progress. We can continue to advance our cause only by adhering to reform and opening up," he added.

China has a long way to go.

It needs about 40 trillion yuan ($6.4 trillion) to pay for a 10-year urbanization plan the party hopes will close the chasm between the country's urban rich and rural poor.

Beijing aims to bring 400 million people to cities as the new leadership of president-in-waiting Xi Jinping and premier-designate Li Keqiang seek to turn China into a wealthy world power with economic growth generated by affluent consumers.

Xi and Li are set to take up their government posts by the end of the parliament session, which is scheduled to conclude on March 17.

Income Gap

Despite its ranking as the second-largest economy globally after three decades of stellar growth, China remains an aspiring middle-income country riven with inequality and dependent on state-backed investment.

About 13 percent of China's population still live on less than $1.25 per day, the United Nations Development Program says. Average urban disposable income is just 21,810 yuan ($3,500) a year.

(Read More: China Lets Gini Out of the Bottle; Wealth Gap Widens)

According to the latest reckoning by Forbes, China has 122 dollar billionaires. A rival list in the Hurun Report says China has 317 billionaires - a fifth of the total number in the world.

Urbanization could cure China's economic imbalances, a study by consultants at McKinsey showed last November, putting it on a path to domestic consumption-led growth within five years to replace three decades of investment and export-driven development that stoked global trade tensions.

The government hopes 60 percent of China's population will be urban residents by 2020, from about half now, and will build homes, roads, hospitals and schools for them.

In January, the State Council, or cabinet, issued a new fiscal framework to make rich individuals and state corporations contribute more to government coffers and strengthen a social security net for those at the bottom.

But tackling China's wealth gap will need more than just taxes. Analysts say state-owned enterprises will have to be privatized and the hukou system will have to be dismantled.

Wen said China should accelerate reform of the household registration system, register eligible rural workers as permanent urban residents, exand coverage of basic public services to all permanent urban residents and create an equitable environment for the free movement of people.

(Read More: China OKs Sweeping Tax Reforms to Tackle Inequality)

The lack of access to basic public services suffered by China's roughly 158 million migrant workers is cited by economists as a key restraint on domestic consumption growth.

Migrant workers are paid less than their urban counterparts and save harder to cover potential health and education costs.

But while Wen was heavy on promises to change China's economic model, there was a ring of familiarity to much of his speech and the spending priorities laid out in separate documents issued by the Ministry of Finance and the powerful National Development and Reform Commission (NDRC), the country's top economic planning agency.

Increased Spending

In a broad series of increased commitments, the Ministry of Finance said China would boost fiscal spending in 2013, raising the fiscal deficit target to 2 percent of gross domestic product from 1.6 percent of GDP in 2012.

A rush of approvals worth some $150 billion for key infrastructure projects in the second half of 2012 helped cushion last year's economic slowdown.

Railway spending has been key to that boost and the NDRC said it would put into operation 5,200 km (3,225 miles) of new railway lines this year.

In a separate document, the Ministry of Finance said it was raising the quota for bonds issued by local governments to 350 billion yuan in 2013, compared with 250 billion yuan in 2012.

(Read More: China Economy to Underpin Global Demand in 2013)

It also pledged to further strengthen regulation of local government debt and curb irregular financing activities.

China's local governments have been dogged by debt worries since racking up 10.7 trillion yuan of loans by the end of 2010. They borrowed heavily to finance their contributions to infrastructure spending laid out in a 2008 stimulus program launched by Beijing in the face of the global financial crisis.

China said it would raise military spending by 10.7 percent to 740.6 billion yuan, building on a nearly unbroken series of double-digit rises in the defense budget over two decades.

The government also announced that the domestic security budget would rise 8.7 percent to 769.1 billion yuan, the third year in a row it will outstrip defense spending.

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