China's consumers let the side down

BEIJING - China's consumer spending, which already makes a lackluster contribution to the world's fastest-growing economy compared with investment and trade, may have hit a two-decade low as a share of gross domestic product (GDP) last year, despite anticipated growth in urban income higher than that of the aggregate economy, according to a Chinese government think-tank.

As housing prices continue to rise, Chinese people's stronger desire to buy their own homes may further curb their consumption of other commodities.

Consumption by Chinese residents contributed only about 36% to GDP in the first three quarters last year, according to the report. That compares with around 60% from 1978 to 2002, when China just started its economic reforms and opening up to the rest of the world. The figure slipped to 50% in 2006.

The latest decline comes as inflation-adjusted disposable income of Chinese urban residents increased by about 13% year-on-year in 2007, a report by the Chinese Academy of Social Sciences (CASS) said.

If that pace continued to the end of the year, it will be the first time for the past five years that growth of urban income surpasses economic growth, according to the report. China's economy was forecast to expand by about 11.5% in 2007. The country's income growth also outpaced economic growth in 1979, 1986, 1990, 2001 and 2002.

The CASS report said the income of Chinese farmers would also be at an 11-year high of 8% growth last year.

The smaller consumption contribution to the country's sizzling economy, compared with an average 70% across the world, had long been seen as a weak link in the country's economic growth. The report said consumer spending was mainly dragged down last year by surging housing prices, with people's stronger desire to buy their own houses curbing consumption of other commodities, according to Li Peilin, director of the Sociology Institute under CASS.

Housing prices jumped 7.3% across 70 cities in January-November compared with a year ago, even as the government took measures such raising interest rates and acting against speculators to limit increases. In some cities such as Beijing and Shenzhen, Li said, prices rose by more than 10% in the first 11 months last year.

In November alone, housing prices in the 70 cities were up 10.5% on average year-on-year, the largest monthly gain since July 2005 when China started to cover more cities in its monthly housing price survey.

Li said another factor was the surging price of food, especially of pork, vegetable, edible oil and grain. In November, the consumer price index rose 6.9%, more than double the government's inflation target of 3% and the biggest increase since 1996. Food prices, accounting for one-third of China's CPI, ballooned 18.2% year-on-year in November, compared with 17.6% in October.

Fixed-asset investment, exports and domestic consumption are considered as the troika pulling forward China’s economy. However, in the past two decades, domestic consumption has remained weak while growth in investment and exports are strong. So much so that there is a saying in China that the cart of the Chinese economy is pulled by two strong horses and one weak donkey.

In January-September, 2007, China’s GDP totaled 16.604 trillion yuan (US$2.3 trillion), up 11.5% year on year. Fixed-asset investment reached 7.825 trillion yuan, up 26.4%. Exports grew 27.1% to US$878.13 billion (6.806 trillion yuan). By comparison, social retail, the indicator for domestic consumption, increased by only 15.9% during the period to 6.383 trillion yuan.

During the period, domestic consumption was equivalent to 38.4% GDP. By comparison, exports and investment was equivalent to 41% and 47% of GDP respectively.

Traditionally, Chinese people are fond of saving money, though the Chinese government now wants to encourage them to spend. By the end of November, private savings in Chinese banks totaled 17.033 trillion yuan, 371.6 billion yuan more than the end of 2006, even as many people withdrew their savings to play stocks.

''China lacks a sound public medical care system and a sound social security system, and as a result, working people have to save money for the rainy day and in case of illness,'' a sociologist researcher with CASS said, who declined to be named. ''Moreover, costs in education have been growing like mad, and parents have to save for their children’s future schooling.

''To encourage people to spend, the government cannot just shouting slogans. It must take real action to put people’s mind at ease about their future,'' he said.

Consumer spending may get a boost from the National People's Congress recent decision to raise the individual income tax threshold from 1,600 yuan a month to 2,000 yuan, effective from March 1. The threshold rise will mean 70% of income earners will be free from paying income tax compared with the present 50%. The amendment will go into effect as of March 1, 2008.

The country's leaders have repeatedly called for a bigger role of consumption in the economic growth to relieve its reliance on investment and exports. The point was stressed again at the 17th National Congress of the Chinese Communist Party (CCP) in October last year.

But in face of growing costs in housing, medical care and education in recent years, Chinese people are tending to save more. In past couple of years, increasing numbers have also been putting their money into the stock market, instead of spending, analysts say.

The number of new A-share stock accounts opened daily reached about 350,000 in April. As the country's stock markets became more volatile in the second half, the number of new accounts opened per day dropped significantly, but still hit 122,000 in the last week of November.

Enthusiasm of retail investors helped to drive up the benchmark Shanghai Composite Index almost threefold before a retreat towards the end of the year, after it more than doubled in 2006.

(Asia Pulse/Xinhua News Agensy)