Op-Ed Contributors

Sow new seeds for consumption

By Chi Fulin (China Daily)
Updated: 2010-01-27 07:58
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As China races to accomplish the goals set in the 11th Five-Year Plan that began in 2006 and ends this year, many of the nation's policymakers and researchers are busy mapping out the guidelines for the next five years. At this critical moment, it is heartening to see that Chinese think tanks have reached a consensus that the nation is in dire need of a series of reforms to foster a consumption-led economic model. I believe they are aiming in the right direction.

A survey done recently by the China Institute for Reform and Development on more than 350 staff members of government think tanks, research institutions and large companies points out that China needs to reform its development model in the 12th Five-Year Plan (2011-15). And ideally, the next five years after 2010 will build a foundation for the country to launch its second round of reforms since the first round in 1978, to aid in the transition from a planned economy to a market economy.

Although in the past few years China's GDP (gross domestic product) has grown dramatically, with a GDP growth of 8.7 percent amid 2009's financial crisis and a likely 9-percent growth this year, many economists said they believe China's growth is not sustainable and its quality is substandard. Reforming the development model is what we need to ensure sustainability, and social equality.

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Before going into details of what to do, let me first sketch out the desired effects of the 12th Five-Year Plan with a few numbers: In 2015, household consumption will account for 45-50 percent of GDP compared to the current 35 percent; 50 percent of the country's GDP will come from the service sector instead of the current 40 percent; more than 55 percent of China's population will be urbanized, compared to the 45.7 percent in 2008; and per capita GDP will reach $5,000, instead of $3,000 in 2008.

The way to achieve this goal is to base our sustainable growth in consumption - the coming five years are critical for steering toward this path. Chinese policymakers should waste no time in addressing the country's excessive dependency on investment and exports for growth. Instead, they should focus on the population of the impoverished, offering them better social security and higher incomes so that they will be more willing to spend. If household consumption accounts for 50 percent of GDP in 2015, we will be able to say that the country is basically a consumption-driven economy. Right now, there are already signs that Chinese consumers are demanding more than just food and clothing. They are spending more on health, education, housing and durable goods, such as cars and electronic appliances. China is now at a turning point to spur growth in domestic spending.

However, a consumption-driven growth will not come until we have a stronger service industry that has equal accessibility for urban and rural residents.

A higher urbanization rate is required for a more developed service industry and, of course, for more household spending. I believe China will witness a rapid growth in the urban population in the coming years as urban-rural integration evolves. Starting from this year, former farmers who have become migrant workers are allowed to settle down in small- and medium-sized towns and cities as legal residents - I believe within three years, the bigger cities will start to do the same. That would put an estimated 200 million migrant workers on a much sounder social footing, making them more likely to spend.

China should also reform its rigid administrative division system to be better suited to new economic and social developments. Take Yiwu, China's famous small commodity trades center, for example. Under administrative governance, it is a county-level city under the jurisdiction of the city of Jinhua, Zhejiang province, but it is more known nationally and internationally than Jinhua in generating profits. If Yiwu could be upgraded into a prefecture-level city, more of its people would be recognized as urban residents.

The growing number of city clusters in central and western China in the coming five years as well as the speedy construction of infrastructure, such as railways and highways, will also help boost urbanization.

The new development model also requires the government to shift focus from specific development projects or making investments to providing services.

With the rise in China's social conflicts, the need for innovation through reforms should be imminently addressed.

To fix the lopsided domestic growth pattern, the country should narrow the widening income gap between the top and bottom rungs of society. For a very long time, China's workers have been underpaid under the current distribution of income. With this unfairness, our economic development cannot be sustained. The poor should be entitled to a bigger share of the income pie so that they can become a force to drive up domestic consumption.

Furthermore, China should allow farmers to capitalize on their land-use rights, which will also help boost lagging rural incomes. Farmers should be conditionally allowed to receive shares in an investment project by contributing their land or using their land to receive bank loans.

In addition, more of the State-owned assets should be used in the public sector, but not simply for a few large national corporations. China should also force its State-owned companies to disburse retained earnings through dividends and encourage them to take in more private investment. This will be a difficult task, but we must do it.

Social security should receive a greater share of public finance. According to my preliminary calculations, China may need 15-20 trillion yuan ($2.2-2.9 trillion) in building a sound social security network in the coming 10 years. The government of Guangdong province has already taken the initiative and is planning to invest 2.4 trillion yuan in social security in the next decade. The investment is huge and the determination is strong. And the investment will soon reap dividends and help improve the quality of the workforce, a necessary and efficient step to upgrade the production chain.

The author is a senior political advisor to the Central Government and President of China Institute for Reform and Development.

(China Daily 01/27/2010 page8)