Article
Challenge 1: Growth Model Transformation
The world financial crisis hit the Chinese economy very hard. So many export oriented enterprises went into trouble, many of them even shut down. Now a serious question in front of us is how can we change the growth model from export driven to domestic demand oriented? Particularly consumption. The domestic consumption still has a huge room for us to capture. The question now is how to stimulate consumption.
Dr. Xiaonian Xu, CEIBS
You have to ask why Chinese people don't consume that much. They save a lot money in banks, why they don't consume? Because of social security. They don't feel safe in the future. They worry about their retirement, they are worried about healthcare, worried about their children's education. All of them point to one thing: social security.
Xu Xiaonian, Professor of Economics and Finance at CEIBS said the Chinese people's tendency to save has historic reasons. China started its social security system nationwide in the mid 19-80's to provide welfare for health, housing, retirement and employment. However, only around 21% of the whole population is included in the social security system, while that number in the U-S is around 71%. Therefore, providing social benefits will be the first step towards boosting consumer confidence and making citizens worry less about saving.
Dr. Xiaonian Xu, CEIBS
Number two, we have to cut taxes. Cut taxes for enterprises, cut taxes for households. Let people have more money to spend. Also policies need to be created to change the income distribution and increase people's wealth. Such as the state shares, I have proposed to distribute all the state shares to Chinese households to distribute these lands to Chinese peasants.
In the last couple of years, China's farmers have looked for job opportunities in cities and towns. And this helps the urbanization of China. However, the land privatization proposed by many economists would allow farmers to increase their income level without leaving the countryside.
Dr. Xiaonian Xu, CEIBS
Farmers can trade their land in the market. The land should be allowed into the market. If farmers can get a better job, or higher pay in the city, they can sell their land in the market. That's what we call resource allocation.
Chinese officials have also realised the importance of developing the back country, or hinterlands. Early this year, the state government issued a series of policies such as vehicle and home appliances subsidies to boost consumption in rural areas. CEIBS Dean Rolf Cremer also commented on the importance of rural development in China in the coming decades. He agreed that developing the hinterlands is the right step forward.
Cremer, Dean &Professor of Economics, CEIBS
I think there are two main reasons to believe the right step and that it is also possible. The first one is the Chinese authority have developed of the past few decades, the infrastructure -- like railway, road and air traffic systems-- to link the hinterland with the coast entry and internally within the hinterland.
Starting in 2001, China invested 720 billion yuan in rural development. And that number has been growing at a rate of around 20% year on year, exceeding 2 trillion last year. The investment in rural infrastructure creates a logistical framework, and makes it possible to produce and consume throughout the whole of China rather than just the urban centers.
Cremer, CEIBS
The second reason has to do is the stability, it is not only possible to take the reform into hinterland, it is also necessary, because the gap has opened up between the advanced places in the East of China and the vast hinterland, is potentially a source of discouragement, frustration, dissatisfaction or even instability. My impression is that the Chinese authorities just about everywhere have recognized this problem very well and are very concerned about this.
Although the world economy is now recovering from the global recession, many believe that overseas demand will never return to pre-crisis level. Therefore, boosting domestic consumption, especially rural consumption, is indeed the top priority for policy-makers now. And shifting the economic focus from manufacturing to the service industry is another important part of the country's growth model.
Dr. Xiaonian Xu, CEIBS
Once we change our economic structure, we move our emphasis from manufacturing to the service industry. We can create a lot jobs, because the service industry is labor intensive, not really capital incentive. Service I mean telecommunication, financial services, healthcare such as nurses, doctors and clinic staff. Also eduction, transportation.
In the past, China has prioritized the development of manufacturing industries. But with many resources contributed, manufacturing still failed to create enough jobs for Chinese people. Therefore, further reform is the key to achieving full employment once growth slows down. The service sector makes up 40% of the total G-D-P in China. Some industries, such as the financial service, have been growing at a rate of 20% for the past couple of years, in terms of contribution to G-D-P. But to sustain this growth, private enterprises need to play a bigger role.
Dr. Xiaonian Xu, CEIBS
What we need is deregulation. We ask the government to open it up. Why telecommunication can only be run by state owned companies? Why don't we have private enterprises to join the market? I just don't understand. To support the service industry, we need new types of financial institutions. Such as small loan companies.