South China Morning Post
Comment›Insight & Opinion
Stephen Roach says the success of its economic restructuring will depend on boosting low levels of private consumption, and that can happen only with improvements to its social safety net
Structural change and rebalancing are formidable undertakings for any economy. China has been focused on these objectives for five years – seeking to transform a powerful yet unbalanced growth model based largely on exports and investment into one driven increasingly by its consumers. Success is essential if China is to avoid the dreaded “middle-income trap”.
The results have been mixed. China has been highly successful in its initial efforts to shift the industrial structure of its economy from manufacturing to services. But it has made far less progress in boosting private consumption. China now has no choice but to address this disconnect head on.
The performance of China’s services sector has been especially impressive in recent years, with its share of gross domestic product increasing from 44 per cent in 2010 to 51.6 per cent in the first three quarters of 2015, according to official statistics.
By contrast, consumer-led growth has been much slower to materialise. After bottoming out at 36 per cent of GDP in 2010, private consumption’s share of GDP inched up to 38 per cent in 2014.
With its prowess in central planning, China has always been adept at engineering shifts in its industrial structure. But it is apparently far less proficient in replicating the DNA of a modern consumer culture – specifically, in altering the behavioural norms of its people.
The disconnect between surging services and lagging growth in private consumption has been accompanied by a steady rise in the urban savings rate to 30 per cent in 2014 (from 24 per cent a decade earlier). This has occurred despite a significant increase in the personal income share of the Chinese economy. Chinese families have been reluctant to convert much of this newfound income into discretionary spending.
China’s rising urban savings rate in a climate of vigorous per capita income growth reflects a persistent preference for precautionary saving. Unfortunately, this is a rational response to the uncertain future faced by the majority of families, underscored by the lack of a reliable social safety net. Moreover, anxiety over inadequate provisions for retirement is set to intensify as a rapidly ageing population enters the most vulnerable phase of its life cycle.
The good news is that the 13th five-year plan appears likely to address these concerns explicitly. Early indications suggest it will focus on the missing piece of consumer-led rebalancing: a strong social safety net. A proposed consolidation of rural and urban plans for pensions and critical health care is particularly important, as is a commitment to allowing workers to transfer their hukou (residency permits) – and the associated social welfare benefits – wherever they move.
But the biggest breakthrough in reshaping societal norms was replacing the one-child policy with a two-child limit beginning in 2017.
Over the past 35 years, China’s powerful growth model has yielded extraordinary progress in terms of economic growth. But speedy implementation of the shift from production to consumption will be vital if it is to remain on course. That will require resolving the disconnect between the structural shift to services and the behavioural norms that will shape the spending habits of its people.
And that means overcoming the understandable caution of Chinese households in the face of an uncertain future. Converting fear into confidence is a daunting task for any society. China is no exception. The focus on resolving the macroeconomic disconnect is thus very encouraging.
Stephen S. Roach is a faculty member at Yale and former chairman of Morgan Stanley Asia.