In central Hubei province, farmers look at the new hospital in the nearest town with skepticism. As far as Farmer Pei is concerned, it represents a potential expense he can ill afford. Sucking on a cigarette as he walked along a road from his fields, the middle-aged farmer said he was reluctant to use it.
"Treatments are very expensive and we have to bear the entire cost of treatment ourselves," he said.
Treatment at the hospital costs much more than local doctors who do basic medical work from lowly storefronts, successors to the barefoot rural doctors who dispensed herbs.
"There is no medical insurance, and no help if we get sick," Pei said.
For the majority of China’s rural community, life is uncertain without the old, albeit threadbare, safety net. If the government has its way, though, action will be taken to ensure these people do not slip into the void.
In the eastern Hubei district of Xinzhou, northeast of Wuhan, for example, many of the walls once daubed with political and birth control slogans now bear words urging farmers to sign up for medical cooperative schemes run by local district governments. Finding farmers that have actually signed up for the scheme, though, can be difficult.
Yet it is Farmer Pei, and 750 million rural residents like him, who are at the center of a development matrix designed to pull them from poverty and push China toward consumption-led growth.
"There is an awful lot of potential consumption that can come out of the countryside," said Stephen Green, a senior economist at Standard Chartered Bank in Shanghai.
The trick is putting people in a position where they can spend.
China has done an extraordinary job lifting people out of poverty but many have been left behind. By the end of 2005, 23.65 million rural Chinese still lived in absolute poverty, without adequate food and clothing. Based on the UN poverty benchmark of US$1 per day, that figure grows to 200 million. It is the world’s second-greatest concentration of poverty.
This large group of poor exists alongside a growing number of wealthy. The World Bank claims that between 2001 and 2003, the incomes of China’s richest 10% grew by over 16% while the poorest 10% took pay cuts of 2.4%.
With social tensions – driven by those who feel they have been left behind by China’s growth surge – lurking in the background, reform has taken an immense political significance. President Hu Jintao has put the creation of a harmonious, xiaokang ("well-off") society high on his agenda heading into 2007.
People are not promised riches but the goal is to ensure they have enough to get by. This will be underpinned by political, economic and social development, as well as balanced growth between urban and rural areas, regions and ethnic groups.
Carried along on this wave of social awareness, is an acknowledgement of the nationwide welfare hole created by state sector reform and the withering of the collective economy. Financial insecurity and a lack of a social safety net is widely seen as responsible for a savings rate of 30% among Chinese households.
The plan is to improve health, education and infrastructure provision, particularly in rural areas, and thereby reduce savings and boost consumption.
"The idea over the long term is that if you can put in place a comprehensive and reliable social insurance system and healthcare then you should, in theory, have an effect on precautionary savings levels," said Green. "That’s the theory, but it’s hard to find empirical data of that happening anywhere in the world."
If it works, this social solution includes a macroeconomic payoff – one that may well endow China’s development model with a sense of sustainability.
For a quarter of a century, the world’s fastest-growing economy has been driven by a mixture of investment at home, largely foreign-funded, and consumer demand abroad. A consensus is now emerging that the ingredients must change. This is where domestic consumption comes in.
According to Jonathan Anderson, chief Asia economist at UBS, China is now perhaps the world’s strangest macroeconomy, juggling rapid growth, record investment ratios with falling profits and a sky-high trade surplus.
"In short, something looks more than a bit out of whack – and suddenly the issue of ‘China rebalancing’ has become a veritable cottage industry among analysts and observers," he said.
In 2005, fixed-asset investment (FAI) hit 45% of Chinese GDP and is expected to reach nearly 50% in 2006.
This ratio is unheard of, said Stephen Roach, chief economist at Morgan Stanley. Even at the height of Japan’s postwar development, when the country recorded Chinese-style growth rates of around 11%, its investment as a share of GDP never climbed above 34%. Export growth, weighing in at around 30% a year, is showing no sign of slowing.
"A continuation of the Chinese investment boom is a recipe for excess capacity and deflation," Roach warned. "A continuation of the Chinese export boom is a recipe for trade frictions."
Tightening measures imposed by the government appear to be bearing fruit. Urban FAI growth came in at 26.6% for the first 11 months of the year, down on the 10-month figure of 26.8%. In October, FAI growth was just 16.8% (economists estimate that November’s growth rate was more in line with the 23.6% seen in September) and this cutback on capital expenditure was linked to a fall in imports. As a result, October’s trade surplus hit a record US$23.8 billion.
According to the World Bank, while over-investment is still a concern, it is this surging trade surplus that is China’s main short-term macro imbalance.
"The lower investment growth that the authorities aim for, which is desirable for efficiency reasons, could aggravate the external imbalance if achieved without more consumption growth," said Bert Hofman, the World Bank’s lead economist for China, in November.
"These considerations put a premium on measures to boost consumption alongside those already taken to reduce investment growth."
The theory goes that by diverting finances from investment spending to consumer spending, most readily achieved through fiscal policy, consumption will go up and investment down. It is hoped that the inevitable slowdown in imports of capital equipment will be offset by a rise in imports of consumer goods.
Official figures show total consumption by the government and the public has been dropping for 20 years, from around 62% of GDP in the 1980s to 51.1% in the first three quarters of 2006.
Discounting state spending, public consumption hit a record low last year, dropping to 38.2% of GDP from 48.8% in 1991. It is believed to have been 37% at the end of 2006, much less than the 50-60% seen in most other Asian countries.
Paradoxically, real consumer spending has been growing at an average annual pace of 10% over the past few years, faster than anywhere else in the world. However, it has simply been outpaced by fixed-asset investment and export growth, over the period, which together now account for around 80% of China’s GDP.
Whatever social provisions are made, based on current consumer sentiment, extracting further expenditure from the population is no easy task.
Having asked urban Chinese households what they felt they need to "get by", researchers from Gallup found that the average cost of living is currently about 10% beyond annual incomes. Rural households put the number at 17%. Not surprisingly, the same respondents felt that they were not saving enough.
In 2004, 68% of people surveyed by Gallup were dissatisfied with their ability to save, up from 61% in 1997. Given greater income, the average household would save more rather than spend more.
Nevertheless, China’s leadership is warming to its task. Hu’s plan is backed up by the sweeping new socialist countryside policy unveiled in the government’s 11th Five-Year Plan, details of which were released last February.
"The only way to ensure sustainable development of the national economy and continuous expansion of domestic demand is to develop the rural economy and help farmers to become more affluent," the government said.
The policy, which includes axing a 2,000 year-old agricultural tax and increased spending on rural health, education and infrastructure, may already be having an effect. According to UBS, consumer spending over the last few quarters has been driven mostly by a strong increase in rural incomes and spending, up 20% on average in 2005 and 10% last year while urban spending has remained flat.
"Perhaps the most exciting source of new demand and development in China is the return of farm incomes and rising migrant wages," said Anderson.
When former President Deng Xiaoping threw China’s doors open to the outside world and welcomed Western-style market reforms by declaring that to "get rich is glorious", he was realistic enough to add that "first a few must get rich".
Hu will be judged by how helps those left behind follow the first movers up the income chain.
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