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Caged Tigers: Increasing Chinese Consumption By Sharing The Wealth

Article illustrative image Partner logo Why are Chinese people so reluctant to spend money?

-Editorial-

BEIJING - It is a well-known fact that Chinese people don't like to spend money. Since the 1998 financial crisis, China's policy makers have been trying to expand domestic demand, and in particular Chinese consumption, to let the "caged tiger" loose.

In other words, it is time that people dig into their savings.

Since 1998, the tiger is still in the cage and the government has not seen the result it was hoping for. Consumption as a share of GDP has not grown significantly, while the caged tiger seems to be growing fatter and fatter. China’s growth is investment-led -- not consumption-led. 

In his last work report as Chinese Premier, Wen Jiabao said the challenge was to expand domestic spending. He said that the succeeding government should “enhance people's ability to consume, keep their consumption expectations stable, boost their desire to consume, improve the consumption environment and make economic growth more consumption-driven.”

Why are Chinese people so reluctant to spend money? Because they haven't got much money. And why haven't they got money? One of the major reasons is because the balance of China's national income is tilted to the side of government and enterprises. According to statistics, between 1990 and 2010, the per capita income of Chinese urban and rural residents only increased 10.4 times while China's total national income increased more than 20 times.

Between 1995 and 2008, the per capita income dropped from 55 % to 42% and the GDP per capita dropped by 12% while the corporates profit in GDP share went up by more than 9%.

Had the government’s share of the pie – our national income – been invested through fiscal expenditure on social security, the Chinese people would be less worried about the future and would dare to spend more. Unfortunately, the reality is that though China's financial investments in people's livelihood have gradually increased in the past few years, we have yet to find a solution for social security issues – healthcare, pensions and education. In this country, people face huge pressures in regard to education and housing costs. It is no wonder that people don't spend any money.

The fine are of wealth creation

Increasing consumption is not about creating a national pie, it is about the government finding ways to share the pie. During the 18th National Congress of the Chinese Communist Party last autumn, China's policymakers promised that the government would double both its 2010 GDP and its per capita income by 2020.

According to experts, if you take into account the inflation, for this to be achieved, per capita income growth has to exceed GDP growth. In other words, as long as the pie is not being shared, even if China's GDP continues to rise at a relatively high speed; the per capita income will not double by 2020.

Take Japan as a comparison. When Japan set the goal of doubling its per capita income between 1960 and 1970, its average per capital income grew at a rate of 11.5% annually – 1% more than its average GDP growth. Japan managed to reach to its target within seven years.

So what is the best way to share the pie? We believe that, first, wages have to increase and that the wage share of GDP has to increase too. Second, during the secondary distribution process, the population’s burden has to be reduced through tax reform.

Recently a Chinese tax official said that there is no more space to continually raise China's personal income tax threshold. A lot of complaints about the Chinese taxation system are due to the fact that it doesn’t take into consideration marital status, total household income and the number of dependents. The result is that the concession rate (deduction) doesn't fully reflect the taxpayers' burden. If the current classified income tax system can be changed to a comprehensive (integrated) income tax system, then the levy on ordinary people will be lightened.

China's economy has entered the medium-speed growth stage. Many believe in the national income being tilted to the government because this concentrated power can achieve more for China. However, from the overall economic point of view, sharing the national income pie with the people is the best way to increase China’s growth. Urbanization is regarded as the main engine of China's future economic growth. However it is impossible to sustain this engine's energy without increasing the country’s per capita income.

Increasing incomes is bound to drive consumption. Ultimately that's the main driving force of China's urbanization. 

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