Pro-Growth Policies Not Enough for Chinese Communist Party

Pro-Growth Policies Not Enough for Chinese Communist Party

Greater consumption needed to preserve Party’s legitimacy

By Gary  Feuerberg
Epoch Times Staff
Created: Apr 26, 2011 Last Updated: Apr 27, 2011
REBALANCE: Christopher A. McNally says that Chinese communist leaders are serious now about making changes toward a more consumption-driven economy. Dr. McNally is director of the China-U.S. Relations Program, University of Hawaii-Hilo. He spoke April 12

REBALANCE: Christopher A. McNally says that Chinese  communist leaders are serious now about making changes toward a more  consumption-driven economy. Dr. McNally is director of the China-U.S. Relations  Program, University of Hawaii-Hilo. He spoke April 12 (Gary Feuerberg/The Epoch  Times)|China|EpochTimes&url=

WASHINGTON—One pillar of the Chinese Communist Party’s (CCP’s) legitimacy has  been a growing economy, but strong growth is no longer enough. The CCP’s leaders  now recognize that China’s export-driven economy needs to become more consumer  oriented, but they may lack the will needed to make the necessary changes.

“The Chinese economy is at a crucial threshold,” said Dr. Christopher A.  McNally, the director of the China-U.S. Relations Program at the University of  Hawaii-Hilo. McNally spoke at the East-West Center in Washington, on April 12.  The leadership has decided “they have to do it now or otherwise it will have big  problems down the road.”

“Without effective measures to rebalance the  economy, the legitimacy of the CCP is in jeopardy,” said McNally via e-mail. It  will not be easy for the Communist Party to implement the new policies, but they  need to make the changes to enable the Party to survive, he said.

The  idea of rebalancing the economy so that the economic growth path is directed to  expanding the consumer sector has been around for six or seven years among the  leadership, said McNally. Nicholas Lardy, senior fellow at the Peterson  Institute for International Economics wrote about it back in 2006.

But  currently there is a “distinct seriousness about rebalancing and moving China  toward a domestic consumption-based growth pattern,” said McNally, whose  research focuses on the nature and logic of Sino-capitalism. The 12th Five-Year  Plan (2011–2015) and several recent policy measures have provided “a new policy  framework to address these imbalances,” McNally said.

But economist Dr.  Tianlun Jian said in an interview with the Epoch Times that while China has been  talking about increasing the consumption share of Gross Domestic Production  (GDP) in recent years, “it has only been declining.” Due to China’s  macroeconomic policies, it has declined to about 35 percent.

The policy,  for example, of the undervaluation of the currency to promote exports, “drives  down domestic residents’ income and widens income inequality across regions and  between the rich and the poor.” Other policies that are promoting growth and  investment keep driving down the share that the domestic consumption contributes  to GDP.

The Chinese government would have to “change the fundamental  economic structure and policies that have driven its growth,” said Jian, who  formerly worked at the People’s Bank of China (PBOC).

McNally agreed  that the regime is not about to do that. “I know the Chinese [communist leaders]  are not thinking of changing the basic tenets of its financial system.” They are  taking a different route, he said. Whether the Chinese would have to liberalize  the financial sector—stronger market forces, deregulation, and strengthening of  the service sector—to create a consumption-oriented economy, McNally did not  know.

Paying for Social Welfare Services

On paper, China’s centralized economy should generate a huge amount of cash  that could be invested into social services such as health care, unemployment,  and disability pensions.

China’s centralized economy centers around state  owned enterprises (SOEs) in many key sectors of the economy. “The state has been  paying dividends to public shareholders but not to the state,” a policy that is  changing, explained McNally. Beginning in 2008, most profitable enterprises were  required to give 10 percent of profits and in 2011 this jumped to 15  percent.

However, the key is implementation. “So far, we don’t have any  information how much of that money has actually been collected from the Minister  of Finance,” said McNally.

Jian is skeptical that the Chinese government  can balance the economy by taxing state-owned enterprises’ profits and  transferring the money to the people. “Yes, it will help improve people’s  income, but only marginally. If exports and investments are set to grow at more  than 20 percent rates, consumption share is bound to decline even further [as it  has in past years], given that growth rates of wages and salaries are much lower  than exports and investments.”

Also, it is important to bear in mind,  says Jian, that “all SOE’s profits in 2010 accounted for only 31 percent of the  industrial profits for the country. It is a small portion in GDP growth,  compared to huge exports and investments.”

Dr. John Lee, a visiting  fellow at the Center for Independent Studies at the Hudson Institute, says in an  article on why the Party needs to loosen its grip, that China has not adopted a  consumption-driven model because the state favors the 120,000 SOEs over 5  million private companies and 45 million informal private businesses.

“While SOE revenues have been growing at 15–20 percent annually,  mean household incomes have been expanding at a paltry 1–3 percent over the past  decade. It is no wonder that domestic consumption is languishing at around 30  percent of GDP—the smallest percentage for any major economy in the world,” said  Lee.

But the SOE is the basis of how the CCP maintains its economic  dominance and relevance at the grass-roots level, creating business  opportunities for the economic and social elite, he writes. The CCP can’t very  well undermine a system that is producing the Party’s strongest supporters.

Read More…Regulations Not Enforced

Regulations Not Enforced

Jason Ma, an economic commentator for NTD Television, told The Epoch Times  that if one only focuses on the regime’s regulations, the situation looks good,  but 10 or 12 years later, one still doesn’t see benefits for the people.

“If you look at [only] their policy, the CCP would be the best in the  world,” says Ma.

For example, there is a program that has been in  existence since the late 1990s to provide subsidized housing to low- and  medium-income families. But because of official corruption at different levels,  the program hasn’t benefited the target group, Ma said.

“It was widely  reported in Chinese media that people living in the subsidized housing were  driving luxury cars,” says Ma, who adds that local officials won’t implement the  law. Instead they choose their friends and relatives to receive the  housing.

Ma agrees that the CCP knows that relying on exports for fueling  growth—roughly 20 percent of the GDP growth has been exports—is not sustainable.  However, he said there is no urgency this year or the next as the country is on  course for only a slight drop from its pattern of the last decade of roughly 10  percent annual growth, creating large surpluses.

Strengthening the State

One way to increase the disposable income of the Chinese people is by giving  them welfare, which the CCP sees as a way to create clients who will support it.  The main thrust of the policy is not reform, but one of centralization and “ultimately to strengthen the state,” said McNally.

The goal is to build  36 million public housing units in the next five years. McNally says that  reaching that goal is unlikely but even 30 to 40 percent of it would be quite an  accomplishment.

“[The CCP is] trying to move poor urban farmers into the  cities, support them with housing, medical care, schooling, and other welfare  services as well as job training, and therefore, create a much more urbanized  economy that then can consume a lot more as a percentage of GDP,” McNally  said.

The result will be the creation of a new urban class with a stake  in the CCP’s state capitalism, similar to Hong Kong. The new policies are a  statist solution to exact still more control over the state sector earnings and  to co-opt new social interests into supporting the party-state, said McNally.

The plan is for a national health care system, encompassing the rural  and the urban, said McNally. China is also said to be building 5,000 basic  health clinics.

Ma doesn’t believe the Chinese regime is serious about  health care reform. He said that the central government has a “huge” amount of  revenue, “more than people can imagine,” but “just doesn’t want to spend it on  the people.” China could have universal health care coverage now and “it would  only cost 10 percent of the central government revenues.”

When asked on how the CCP can carry out its plans when the  country is fundamentally not stable now—protests and strikes are abundant and  increasing, McNally conceded that the repression has become “incredible in the  last five years,” with a huge amount of resources devoted to repression.  Repression is becoming more intrusive, and surveillance and harassment for  anything the CCP deems unfavorable to the state is on the increase, he  said.

However, “the CCP can play off a large urban population—its new  urban citizenry that rely to some extent on state welfare—against the rich.  Therefore, the CCP can keep its legitimacy going while beefing up the repressive  apparatus,” says Ma.


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