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Adviser to the State Council: China’s extreme income disparity hinders the activation of domestic demand. Ren Yuling, an adviser to the State Council, stated that it is precisely because of the excessive income disparity that most wealth is concentrated in the hands of a few people, while the majority need to consume and desire to do so but lack the means to do so. This is the fundamental reason for the low proportion of consumption in the domestic market and the difficulty in stimulating domestic demand. Adviser to the State Council, Member of the 9th and 10th National Committees of the CPPCC – Ren Yuling. To address current challenges effectively means identifying the root causes of the crises affecting our country, and taking appropriate actions to cope with these issues. Due to the independence of China’s financial system, this crisis should not have had a significant impact on the country. However, China’s excessive reliance on foreign markets for its products, a severe real estate bubble, and extremely wide income disparities have exacerbated the effects of the crisis. Therefore, to address the economic crisis, it is essential to pay attention to and give importance to these four aspects. The three major “risks” to the Chinese economy: First, attention must be paid to the issue of excessive reliance on foreign trade as a proportion of GDP. The proportion of China’s foreign trade in its GDP was 9.7% in 1978, rose to 30.6% in 2000, surged to 63.8% in 2005, and further increased to 66.9% in 2007. China’s degree of dependence on foreign trade now exceeds that of eight industrialized countries and two large developing countries. Due to our country’s high dependence on foreign trade, when an economic crisis severely affects the incomes and consumption of people abroad, exports of products will inevitably decline, and a crisis will surely arise. According to surveys of some enterprises in coastal areas, there has been a decline in export orders and a significant drop in profits; it has become common for companies to incur losses the more they produce. The closure and suspension of operations by some enterprises in Zhejiang and Guangdong are all related to this situation. Secondly, it is necessary to pay attention to the issue of the real estate bubble. Due to the rapid rise in housing prices, these prices have become far beyond the reach of the average people’s income levels, making it impossible for those with genuine demand to afford housing. On the other hand, due to the rapid appreciation of housing prices, homes have become the best investment asset. Driven by foreign hot money, coal entrepreneurs from Shanxi, real estate speculators from Wenzhou, as well as speculation by developers, a real estate bubble has continued to grow, leading to extremely high housing prices. Following the financial crisis, speculators stopped buying homes, and residents who needed housing could not afford it, which led to a significant decline in the housing markets in cities such as Beijing and Shanghai since the second half of 2008. Real estate is a key product in consumer spending; when sales of real estate decline rapidly, more than 60 industries that are closely linked to the development of the national economy, such as steel, cement, building materials, and various household products, will inevitably see a shrinkage in their markets. Third, it is necessary to pay attention to the issue of excessively large income disparities. In China’s urban population, the 20% of wealthy people own 66.4% of financial assets, while the 20% of poor people possess only 1.3% of such assets. In terms of retail sales, in 2007, retail sales of consumer goods in areas at the county level and below, which have a population of over 1 billion people, accounted for only 11.7% of the total GDP, whereas retail sales in cities above the county level with a population of less than 300 million people accounted for 25.5% of the total GDP. On a per capita basis, this difference is around 10 times. It is precisely because of the extremely large income disparity that most wealth is concentrated in the hands of a few people, while the majority need to consume and desire to do so but lack the means to afford it. This is the fundamental reason for the low proportion of consumption in the domestic market and the difficulty in stimulating domestic demand. Why is the purchasing power of consumers insufficient? Since the Asian financial crisis in 1998, we have been advocating for boosting domestic demand. Yet 10 years later, the share of domestic consumption in GDP has not increased at all; on the contrary, it has declined year by year. The reason for this is that we have failed to address the issue of insufficient domestic demand fundamentally. As mentioned earlier, the insufficient domestic demand is ultimately due to the limited purchasing power of the general public. To this end, it is essential to focus on raising the income levels of low-income earners and expanding the proportion of people with moderate incomes, so that efforts to stimulate domestic demand emphasize three key areas. First of all, substantial investment is needed in rural development. In the long run, the issues related to agriculture, rural areas, and farmers remain the most significant problems in China. In this effort to stimulate domestic demand, investment in agriculture, rural areas, and farmers must be given top priority; in particular, a people-centered approach should be adopted, with increased investment in areas where the rural population constitutes a large proportion. Secondly, it is necessary to invest heavily in subsidies for farmers and social security for low-income people in both urban and rural areas. The current subsidies for grain cultivation, agricultural machinery, and the purchase of electrical appliances should be increased further. In particular, emphasis should be placed on raising food prices and strengthening social security for low-income people in urban and rural areas. Third, significant investment is needed in the construction of residential housing for urban residents. To date, in the process of promoting urbanization, we have merely changed the way citizens are counted, resulting in an increase in the urbanization rate by one percentage point per year; however, we have been hesitant about how to deal with these \"new citizens,\" and such efforts have encountered obstacles due to **interests at play**. To address this issue, **efforts to stimulate domestic demand must focus on building low-cost housing, in particular housing at prices that the general public can afford. This will not only help to keep property prices from rising too high and accelerate the recovery of over 60 industries, but it will also provide a new solution to the problem of ensuring shelter for the large number of new urban residents.** Structural adjustment must aim at three objectives. The investment aimed at boosting domestic demand represents a good opportunity for adjusting the industrial structure. The central government’s requirements for building a resource-conserving society and an environment-friendly society are aimed at addressing the serious problems of waste of resources and energy, as well as severe environmental pollution that exist in China’s economic development. This structural adjustment must be based on the development of a \"sustainable and resource-efficient society,\" aiming at the following three objectives, stepping up the pace of adjustment, and strengthening technological upgrades. First of all, it is necessary to set clear targets for conservation and emission reduction. Although our country’s GDP accounts for only about 6% of the world’s total, our consumption of resources and energy **exceeds this proportion**. Based on this, our structural adjustments this time must be aimed at conserving resources and energy as well as reducing pollution; we need to significantly reduce the scale of those industries that cause severe waste of resources and environmental pollution. Secondly, it is necessary to pinpoint the goals of independent innovation. In the past, due to backward technology in our country, many enterprises suffered from poor technical capabilities and increased risks; for example, our country produced 100 billion meters of fabric, 6 billion sets of clothing, and 5 billion pairs of shoes. There isn’t much technical complexity involved here; it’s mainly about exploiting cheap labor, the hard-earned money of migrant workers. Similarly, industries in our country such as the glass industry, elevator industry, detergent industry, cosmetics industry, beverage industry, camera and film industry, and battery industry are all under foreign control, which has led to a significant increase in our passivity and difficulties in controlling the market. In this structural adjustment in response to the financial crisis, it is imperative for us to strengthen independent innovation and provide strong support to domestic enterprises with their own brands. Third, it is necessary to pinpoint the goals for export transformation. With the economic crisis and the shrinkage of markets in Europe and the United States, to maintain export levels, it became necessary to develop markets in ASEAN, South America, Russia, and even Africa. Judging from the situation in Yiwu, Zhejiang, in the second half of 2008, these new markets hold great potential. Paying attention to the development of these new markets can help some export-oriented enterprises overcome their difficulties. However, since countries such as ASEAN, South America, and Russia have different economic conditions and cultural needs from those in Europe and the United States, to enter these new markets it is essential to have product cultures, product designs, and pricing that are appropriate for those conditions. This requires our technological efforts to adapt to the needs of export transformation, by fostering appropriate innovation at various levels, so that our enterprises can seize opportunities and gain a firm foothold in this process of export transformation. Fiscal and monetary policies help to boost domestic demand in order to address economic crises. In particular, to ensure that the central government’s goals of \"promoting growth, expanding domestic demand, and adjusting the economic structure\" are implemented, it is crucial that the fiscal and monetary policies be appropriate and that the measures taken are effective. To ensure that the recommendations in the aforementioned three areas are put into practice, three measures need to be introduced regarding the use of financial resources. Firstly, it is to further expand the scale of government bond issuance. To channel 20 trillion in household deposits into the consumer sector, the most effective approach is to further increase the amount of government bonds issued. This not only helps to boost financial resources but also facilitates the flow of household deposits into consumption, as well as supports the more effective implementation of measures to stimulate domestic demand. Secondly, it is to **promote strict thrift in government agencies**. In our country, household consumption as a percentage of GDP has remained below 40%, which is 30–40 percentage points lower compared to that in developed countries, where this ratio is as high as 70–80%. Furthermore, the difficulty in stimulating domestic demand is also related to the excessive proportion of **government spending** in public finances, high administrative costs, and the overly flexible use of fiscal funds, which leads to significant waste; as a result, ordinary citizens have very limited opportunities to benefit from the second-level distribution of resources. To ensure that our country’s economy remains unharmed amid this global financial crisis, it is necessary at the **governmental level to practice thrift, reduce administrative costs, and allocate more funds to the social welfare of citizens and to stimulating domestic demand. Third, in order to sustain the existence and development of small and medium-sized enterprises and ensure that there are jobs available for the workforce, we must support their growth through fiscal and financial measures. Therefore, a larger share of bank loans needs to be set aside specifically for the development of small and medium-sized enterprises and their establishment. Regarding the collateral for loans, some policies to ease restrictions and increase flexibility should be introduced; enterprises with patented technologies or a good reputation should be allowed to use such patents and reputation as collateral for loans.