In the opening speech of the 18th Congress of the Communist Party of China, President Hu Jin Tao announced that “On the basis of making China’s development much more balanced, coordinated and sustainable, we should double our 2010 GDP and per capita income for both urban and rural residents” He also mentioned that income disparity should also be reduced. All of these goals are to be achieved by 2020.
While this may sound like a positive statement, I am afraid it indicates no improvements from the current situation:
For a start, during the previous decade (2000-2010), personal income for both rural and urban residents has grown by more than double: urban residents’ income has grown from RMB 6,300 to RMB 19,000, or about 11.5% per year. Rural residents’ income has grown from RMB 2,250 to RMB 6000, or 10% per year. Therefore, the new target effectively says “personal income growth will slow down in the future”.
Second, if both rural and urban resident incomes are expected to growth at the same rate (both will double), then it does not do any good to reduce income disparities between people those who live in cities and those who live in the countryside. Admittedly, during the past decade, the urban-rural income gap has, grown, from a low of, roughly, 2.7x in 2000, to a high of 3.2 in 2010. Hence, trying to keep this ratio constant in the future appears like some sort of improvement. However, it should also be noted that much of the urban-rural gap growth has occurred during the first half of last decade (2000-2004) and since then, income disparity has remained pretty much flat. Therefore, the 2020 target looks more like maintaining the 2005 status quo for over 15 years. Most importantly, there is not targeted gap reduction at all.
Thirdly, the thorniest issue of all, the rebalancing of the overall economy: in order to rebalance the economy, personal income must grow faster than GDP; however the 2020 target only calls for equal growth rates for both GDP and personal income. Looking at the GDP from the expenditure approach (GDP=investments + Consumption + Exports), rebalancing the economy means, inter alia, to lower the aggregate saving rate, increase the consumption as a proportion of GDP and decrease the weight of investments. Now, the only way to achieve increasing consumption is to allow personal income to grow faster than GDP, this is because a) Chinese people don’t save as much as people believe and b) even if they have some savings, they will not use those funds to purchase goods: they will only spend more if their income grows. To make things more difficult, the richer people become, the less they will spend as a proportion of their earnings, as expected. Hence the “marginal consumption benefit from increased income” tends to go down. In other words, in order to rebalance consumption through increased income, not only personal income must grow faster than GDP, but must also grow “much” faster. None of this is in the plan.
Finally, we haven’t even touched on the issue of whether the announced targets are actually achievable or not and how does China plan to find the capital to do that.
Michele Geraci is the Head of China Research for the Global Policy Institute as well as Senior Research Fellow and Adjunct Professor at Zhejiang University, Hangzhou. He is also visiting Assistant Professor of Finance at Nottingham University, Ningbo.
Opinions expressed in the CPI blog do not represent the views of the China Policy Institute or the School of Contemporary Chinese Studies at the University of Nottingham. They are the personal views of the bloggers/authors.