by Julie de los Reyes

When the global crisis intensified at the tail end of 2008, China once again found itself the center of international attention.  

Only, it was not news of the country's startling economic performance that was spreading like wildfire this time. By the fourth quarter of last year, China felt the first real signs of trouble, proving that even the world's most dynamic economy is not immune from the global recession.  

The country's export sector, which contributes about 40 percent of its GDP, sharply plummeted to 17 percent, with the collapse of its top export destination, the United States.  Tens of thousands of factories had to shut down in the country's coastal export zones, rendering an estimated 20 million of its 130 million internal migrant workers jobless.   After a five-year double-digit growth run, the economy posted a single-digit expansion of 9 percent in 2008, the lowest in seven years.   All ominous signs of troubled times ahead.

ON THE FAST LANE

Across China's regions, the difficult realities obfuscated by the impressive growth rate of the past decades are making themselves increasingly felt.  The huge disparities that exist within and between the developed and underdeveloped parts of the country have become more pronounced: the six coastal provinces account for half of the country’s GDP, and the income gap between the cities and the countryside stood at as much as 3.36 to 1 in 2008. 

Over the past years, more and more rural migrants have flocked around China's growth centers in search of better jobs and higher wages--an estimated 150-200 million[1], in what is described as “the world's largest ever peacetime migration”.  But with the economic downturn, both urban and rural incomes and the number and quality of jobs available have been negatively affected.  Worse, some 6.1 million fresh graduates are expected to join China's burgeoning labor force this year, and they will have to compete over an estimated 2 million job vacancies in the economy.

With the added strain the crisis is wreaking on the economy, fears that the country is teetering on the brink of social unrest have escalated.  The number of protests climbed steadily over the past years despite the high economic growth; the government worries that the worsening economic conditions will give it the final push.  As one Chinese newspaper[2] warns, China is “entering a peak period for mass incidents ... [it] may face even more conflicts and clashes that will test even more the governing abilities of the party and government at all levels".

SHIFTING GEARS

Hence, the crisis notwithstanding, the government commits to an 8 percent growth, believing that this is “essential for expanding employment for both urban and rural residents, increasing people's incomes and ensuring social stability." 

With the possibility of social unrest looming, the government is hard pressed to find ways to propel the economy forward.  But given the lull in international markets, it was forced to turn inward for the solution—its own vast domestic market.  In the mind of the government, the answer lies in channeling the country's productive capacity to the domestic market—and creating the demand for it.  

In November 2008, the government unveiled a 4-trillion yuan ($585.5 billion) economic stimulus package geared at infusing much needed investment in the domestic economy.  The aim of the two-year investment plan is two-fold: 1) to increase domestic demand and social spending and 2) to set the ground for industrial restructuring. As complement to this, support policies are underway to revive China's ten key industries-- auto, steel, shipbuilding, textile, machinery manufacturing, electronics and information, light industry, petrochemicals, non-ferrous metals and logistics.

To support the weakening purchasing power of rural households, several fiscal incentives have been rolled out, including subsidies and tax rebates, in combination with increased government contribution in insurance, pensions and similar investments.The tax-rebate scheme for household appliances for instance offers rural households 13-percent back for their purchases, a move that not only spurs consumption but also absorbs part of what has been originally produced for exports.  Fu Ziying, the Vice Minister of Commerce predicts that the program “could help stimulate rural consumption amounting to 920 billion yuan, drive up growth of retail sales of consumer goods in rural areas by 2.5 percentage points, and realize household appliance sales of 480 million units." The program can also potentially direct appliance manufacturers to produce in and for the rural areas in the future.

But in a country of conservative spenders, encouraging consumption is not an easy feat.  The Chinese have the world's highest personal savings rate of about 30% of household income, compared to an estimate of 10 % in the European Union and a negative rate of -0.4% in the US. Domestic consumption only contributes to about one-third of China's GDP, compared to around 70 percent in the US.    Investments and exports have been the primary drivers of the Chinese economy, each accounting for about 40 percent of the GDP. 

Moreover, China's total production capacity exceeds domestic demand by a factor of 10, making it all the more difficult to fully offset the depression in exports. The rural areas, especially, carry with it the biggest potential for increasing domestic demand.  Some 700 million or 55 percent of the country's total population are in the rural areas and, based on recent findings by the Chinese Academy of Social Sciences and the National Bureau of Statistics of China,Chinese rural residents' consumption level lags behind urban residents' consumption by at least ten years. 

In large part, the gap in urban and rural consumption can be traced to the equally gnawing gap in urban and rural incomes.  This in turn is a result of a development track that has been largely at the back of industry and that left much of the country's agricultural potential untapped.  The share of agriculture in employment and output has steadily decreased over the past two decades that industries now account for 41 percent of GDP and agriculture for only 11 percent.

Tapping the rural market's tremendous spending potential is clearly a crucial step at fueling total domestic demand, but the government will have to work doubly hard convincing people to part with their money.   It will have to ensure that its efforts are not blunted by the large scale layoffs tugging down rural incomes further and that a reliable security system is put in place, the lack of which was a primary reason why many Chinese feel compelled to save for the future.   The 293 billion yuan allocation for pension, medical reform, insurance and education in the stimulus package is a good initial first step, but there is still plenty of ground to cover.  Figures from Sichuan Province, China's largest exporter of migrant workers, illustrate the state of social security in China: among migrant workers working in enterprises above the county level, only 3.41% have industrial injury insurance, 0.84% are covered by medical insurance, 0.83% receive unemployment insurance, and 2.99% provided with pension payments. [3] 

THE ROAD TO RECOVERY

Government officials project that if the economic stimulus measures pay off, the country could easily meet its 8 percent target growth in GDP this year.  Analysts remain divided on this, even after the Chinese economy showed initial signs of recovery in the first quarter: investment was up by over 30 percent in March and retail sales increased by 15 percent.[4] The combination of increased liquidity and higher consumption, investments and industrial output prompted by the government's stimulus plans may have, for the meantime, successfully resuscitated the economy, but they argue that this cannot be sustained.  For its part, even the government recognizes that despite the improvement in economic indicators, the “grounds for the country's economic recovery are not solid enough yet, as circumstances both at home and abroad remain grim.”

But what does it take to stabilize an economy the size of China?

China's growth over the past decades was nothing short of impressive, but it was far from 'stable'.   Its rise was considered "the most dramatic in terms of its impact on the rest of the world", but it was one precariously anchored on the back of cheap labor from its very own migrant workers.  Consistent pressure to provide jobs have far stretched the economy and its ability to absorb the 10 million workers that enter the labor force each year.  Even the country's high economic growth has started to show decreased impact on poverty reduction. [5]  In fact, even before the crisis struck, China was already begging for deep structural changes.  

It should come as no surprise then that some find optimism amid the crisis.  In a sense, the global crisis has dislodged China off the beaten track of export-oriented growth, forced it to reorient its production and consumption to the local market, rectify the imbalances in development, and address the worsening tensions that have been temporarily silenced by years of high growth.    For how long it will stay the course, and as to how effective its policies will be in the long term is still anyone's guess. The depth of the economic recovery will, after all, take some time to materialize, and implementation might hit a snag in the not so distant future.  But at the moment, it doesn't much choice.

For all its worth, China's renewed commitment to a more stable, domestic-led economic growth is certainly a step towards the right direction.   It may have been one forced by the circumstances, but as Deng Xiaoping said, "it doesn’t matter if it is a white cat or black cat, as long as it can catch a mouse, it is a good cat.”  If ultimately it manages to lay a stronger foundation for the betterment of China's economy and society, then its purpose would have been served.