China’s economy

“Our country must develop. If we do not develop then we will be bullied. Development is the only truth”. This is a quote by Deng Xiaoping, and it represents the dogma of the Communist Party which has formed the economic politics of China in the latest years. It was found in a special report on China’s economy in The Economist. The dogma is truly in line with the rapid growth of the Chinese GDP in the latest 20 years, which measured at purchasing-power parity, already overtakes America.

However, the surplus is disproportionate. Some argue that the top tenth of urban families are about 26 times better of then the bottom ten. Economic iniquity has consequences: China has the world’s largest luxury market. Another point is that the Chinese households cannot spend enough to respond the country’s enormous production. This has led to malinvestments, which many classify as overinvestment, with ghost cities and piles of waste. To ameliorate the situation, a more judiciously distributed budget needs to be implemented by the government. How will China be able to increase the household consumption? First of all, the rate needs to be liberalized. Today, the rate is controlled by the state, which asserts the Chinese banks enough profit and large margins. But it is on cost of the worse well of, who in their economic insecurity avoid consumption, or choose to circumvent the system. China needs higher interest rates in order to liberate consumption.

 Another way to lift consumer spending is for the government to invest more in social security. Even though progress has been made, the social security, including pensions or health insurance, still only reaches a small part of the population. China also ought to repeal the country’s household registration system. This system limits social services for rural immigrants, which leave them unsettled and unwilling to spend. If the people feel secure about the future, the need to save money decreases.

As China has reached an important role in world trade, it can leave its dogma of development, perhaps as much as to not see development as an imperative. China can instead start focusing on developing the country’s social security in order to increase consumer spending and thereby contribute to a more sustainable depletion of the world’s limited resources.  

Source: The Economist, May 26th 2012