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To take China out of the current economic downturn, the government has already taken several steps. Interest rate cuts, housing tax cuts and stamp tax reduction are three measures officials hope will encourage consumption, home sales and stock accounts. But none of them appear to have worked just yet. January’s saving volume went up nearly 23% compared with the same period last year and the transaction volume for residential housing dropped significantly. The NPC and CPPCC will be tackling these issues in the upcoming sessions. How will lawmakers get China out of the economic downturn? Is there a feasible solution?
A: Hello, welcome to the Main Talk. Join us as a guest today is independent economist Dr. Andy Xie. Andy, thank you for joining us.
X: Glad to be here.
A: So why does it seem that these three measures didn’t really do what they are expected to do?
X: The stimulus takes time to work. The fastest stimulus is tax cut. But in the case of China, personal income tax is relatively a small part of fiscal revenue. So cutting income tax does not have a big impact. In terms of investment program, it really takes time to have the impact. I think that in the 2nd half of 2009, the effect will be stronger. But in the 1st half, still I think we have to wait.
A: There should be maybe other cuts that you could possibly at least suggest for that would be take effect quicker?
X: Unlike in the US, their personal income tax is very high. If you cut that tax, it works very quickly. But in the case of China, its value-added tax is very high. It’s 17%. And value-added tax is actually sales tax. So if you cut that, you make things more affordable to people. So that might work. But I think that far more important is that Chinese household sector has wealth problem and income problem. Particularly in terms of wealth, the most shares of the listed companies are owned by the government. The land is owned by the government. The natural resources are owned by the government. In other countries, such wealth is owned by the household sector that supports consumption. I think China needs to consider, needs to think about if some sort of the wealth redistribution may be necessary to jumpstart the consumption.
A: So do you think it’s possible to redistribute the income?
X: I think so, I think that the government owns all the major state enterprises and most shares are owned by the government. 25 years ago, Margaret Thatcher in UK, when she came to power, the economy was dominated by state-owned enterprises. She decided to give the shares to the old people in Britain equally and that led to a ten-year consumption boom. I think if China does the same, it would have the same effect. Many people are worried about the government control over the economy. They think if the shares are spread out, government will lose the control over state-owned enterprises. That is not necessarily true. In the privatization programs in other countries, the government initiates the so-called“golden share”that will give the government the veto power on the board. So the government will have effective control without owning the shares. The shares will be spread among the people to support consumption. So I think that is something that China needs to think about very seriously. The issue is that does the government appreciate what’s going on now is the fundamental changing in the global economic structure. The investment-export-led model may not work in the future. If China wants to move away from that model, some radical steps are necessary.
A: Sum your radical steps, any ideas that you would give the government now?
X: In addition to redistributing the shares to the household sector, China needs to think about floating the exchange rate to make the currents convertible. So the money in other countries can come to China freely to invest and that would support Chinese growth. In the past, China has been dependent on labor-intensive exports. That’s sort of one way to make money to support the investment program at home. But in the future, because if the western consumers are not going to spend money like before, then we need to complement this export economy with something else. The other is that China needs to fix its urbanization strategy. During this downturn, we see a lot of problems with the urbanization strategy. After 20 years, these migrant workers are still called migrant workers because they are not rooted in the cities. As soon as they lose jobs, they go home. I think we need to change the software like the law, the regulations to make it easier for the migrant workers to settle down permanently. These are three elements that China needs to do: wealth distribution, currency convertibility and urbanization strategy. When these three things are done, I think China will be able to have another growth cycle and China considerably could be the leader in the global economy.
A: You talked a little bit earlier about letting the RMB be free flowing. Do you think it’s a good idea? Why would it be a good idea for the economy?
X: Exchange rate is the most important price in our economy. When it gets fixed, it changes the whole economy. We need to shift towards attracting more investment to the country. And if we try to attract investment and your currency cannot float, you have bubbles. So it’s very dangerous. When there’s more demand for your currency, your currency should appreciate, when there’s less demand for your currency, the currency should depreciate. A lot of Chinese officials are uncomfortable with the volatility. When something moves, they feel unstable. Actually price moves everyday is to prevent a big crisis down the road. If you don’t let the currency, every fixed exchange rate ends with a major crisis.
A: Do you think it’s strong enough to survive now?
X: Now China has got two trillion RMB on reserves. So obviously it’s not going to get out of our hand in any conceivable scenario.
A: Does China have a sophisticated enough financial system to handle the free floating now?
X: This is a kind of chicken and egg thing. And the Chinese government always says the people are immature, they are like children, so you shouldn’t let them do this and that. If the system is always like that, people remain like children. Only when people go out on their own, then they grow up. For financial institutions, it’s the same. If you treat financial institutions like children, they will remain so forever. They always look to the government for business, for security and so forth. The right approach is to make sure these financial institutions are dynamic, and have risk management. Once you have that, then our economy will be so much stronger.