Despite positive growth this year, China is deeply troubled

Allison Wagner

    Amidst this recession, economies all over are suffering, albeit to different degrees.  China is almost uniformly recognized as the one economy that has some redeeming features that may still inch out a respectable growth figure this year.

    The reasons given are numerous, some backed up with good data, some not.  When contrasted with India, China does not depend as much on external financing, as it does on external demand.  When sitting on vast foreign reserves, one is not as affected by the global liquidity freeze.  Back in the mid-2000s, China had in fact tried to cool down its economy through lending restrictions and bank restructuring – remember the time when Chinese banks first IPO’ed, the talk of town was concerns over the depth of Chinese banks’ bad loans? Good times, those days.

    So China’s tight fiscal and monetary policy back then aimed to limit domestic lending, and consequently domestic consumption, while hitting those target growth rates and five-year plans. It walks on a tight rope. On the one hand, growth must continue to quell potential social uprisings from rising unemployment.  On the other hand, China desperately needs a back-up plan, should its best customers for the past few decades – the Western consumers emerge from this recession with a permanently lowered propensity to consume.

    To make up for the lack of external markets, and to prevent China from turning into some version of Japan or Germany, both with relatively low internal consumption compared to exports – albeit for completely unique and different historical and economic reasons, China is set to stimulate internal consumption.  Businesses salivate at the rate of growth not only of high net worth individuals in China, but those entering the legion of the mass affluent.  Although middle class members of China are spending at unprecedented rates, economic observers are continuously frustrated at the discrepancy when compared to their western counterparts. How to get them to spend more?

    In response, many government agencies are now paying employee bonuses in the form of product vouchers. Instead of handing them over a few thousand yuans, some companies are simply handing out gift certificates with an expiry date, thus forcing people back into shopping malls.  This way, you are forced to spend, instead of saving.  Products manufactured for export and previously inaccessible for many in the rural regions, are suddenly available, and they are on sale.

    But it’s still not enough. Many would argue that this is a good time for China to use its stimulus to invest in its social welfare system, instead of throwing more money at existing infrastructure projects.  Burdensome costs such as education, health care, and retirement savings are driving people to save like crazy.  At this point, the narrative of a developing China takes a slight turn.  Demographically, it is graying just as rapidly as its more affluent customers and trading partners.  But the problem is compounded, if not exacerbated by the one-child policy instituted in late 70s, as a response to a very third-world country problem of population explosion.

    In the long run, China will have to work out some kind of fiscally sustainable system that will allow for a public, and universally accessible health care system, and some kind of a pay-as-you-go retirement account.  Even at the surface, these are difficult, and no doubt, time-consuming projects to construct and implement.

    1. With much growth of the country taking place on the backs of migrant workers, their residency status, along with health care and education costs (of their children) in the city where they work, must be addressed first.  Much like Mexicans in the US, much of the underground economy, and much of the above-ground economy, is highly dependent on the availability of this marginalized population.  While they work, more must to be done to care for their needs. Should they return to their cities and towns when urbanization abates at some point in the future, the government need to steer the economy in a way that makes place for them.
    2. Taxes are low for the average working professional.  After all, the government cannot take away what it does not provide.  Thus, financial prudence is expected, and often practiced, by the young – saving for a house or a car, children’s education, and the old – for their children’s marriages, and their own retirement and healthcare costs.  This is self-directed education retirement savings plans to the extreme.  The age of the rice bowl, or even lament and nostalgic for such a time, is long over.
    3. When it comes to medical care, it has really only been theoretically free.  Any family with a child on the way, or an ailing elder in the hospital, would have given the doctors and nurses “red pockets” for extra care, even back in the old days.  Nowadays, the level of reimbursements when it comes to medical care is linked to one’s job and title.  Most retired professionals and government servants have adequate health care.  But few has full coverage, and many worry.  Thus the tendency to over-save for a rainy day. Those days usually always come.  Reforms are on their way, with medical insurance and a bare-bone universal care system instituted. But before those can provide the kind of security that does not leave people in the hole after a few hospital visits, people will expect the worst, and save.
    4. The realm of higher education in China is ultra-competitive, and it’s not something people take for granted.  The system is rote, its mechanical, and most absolutely hate it.  But the centuries-long mentality and tradition of glorifying academic success is deeply ingrained.  The scoring system is transparent, simplistic to the point of being robotic, and for all its flaws – both intentional or not, the system is one of the few uncorrupted ones in the country. That is to say, the standards are national, and more or less rids itself of blatant discrimination based on backgrounds and geography, and the best in the game come out on top.  They are then rewarded with scholarships, and sent off to the best schools.  The rest, well, in addition to measuring up against the bar, will have to pay up.  That’s when a lot choke.

    Such is but a snapshot of the myriad of problems facing China, and some may be quite common among rapidly developing regions. One the one hand, it grapples with development issues that range from poverty, over-population and urbanization; on the other hand, like many developed nations, it must confront challenges in social reforms while balancing fairness with equality.