China Expands Social Security

China Daily reports that Chinese social security is crucial to higher consumption.

(emphasis mine)

Social security crucial to higher consumption
By Huang Jing (China Daily)
Updated: 2009-01-15 07:39


The unfolding global recession has already had a great impact on China, causing an economic downturn in recent months. What China's economy faces now is not just short-term difficulties but a fundamental challenge to its development model that originated from East Asia's economic success.

Indeed, from the Japan-led "East Asian miracle" to Asia's rise driven by China's and India's rapid growth,
virtually the whole of Asia (except the oil producers) has followed the same export-led development model in the last several decades, a model that has open and prosperous external markets on the one hand and steady inflows of foreign investments on the other as preconditions.

China's fast economic growth has in a large part been achieved amidst swift economic globalization. But the financial tsunami has brought globalization to a standstill, as the unprecedented crisis has not only reversed the global financial expansion, but also derailed internationalization of manufacturing and services.
It appears as if this export-led growth model has run out of fuel, causing a dramatic economic downturn all over Asia.

But China's effort to rescue this economic downturn has further exposed another problem: the structural imbalance of the Chinese economy, demonstrated by not only the heavy reliance on export-oriented manufacturing and processing industries, but also the excessive expansion of industrial capacity at the expense of consumption. Such a structural imbalance has made China's difficulties in the global recession more painful.

Obviously, the Chinese leadership has keenly realized these challenges and is making a remarkable effort to overcome them. The stimulus plan to invest over $586 billion in the next few years is timely and decisive.



In the long run, however, the remedies for China's economic problems are to increase the consumption level while developing a sufficient socio-economic welfare system. And the two aspects are essentially interrelated.

Indeed, despite a steady increase in investment,
China's consumption rate has kept falling in the last three decades, from around 55 percent of the total GDP in the 1980s to merely 35 percent last year. While this is certainly an unmistakable indication of an underdeveloped internal market, a more serious reason is the slow increase in personal incomes despite the fast economic growth. Yet it is highly arguable that there would be a rise in consumption should personal incomes increase.

Compared with the extra-low consumption rate, the saving rate in China has remained high. This is not necessarily because the Chinese people are economically super-prudent, but because
the insufficient socio-economic welfare system makes them feel insecure about healthcare, children's education, unexpected rainy days and eventual retirements.

This problem is perhaps best demonstrated by the government spending on public goods. To this date,
China is yet to develop national programs on healthcare, housing (subsidy) schemes, retirement, and social welfare. Amidst rapid expansion of the market economy, people's expenditure on life's necessities, especially on healthcare, education and housing, has increased dramatically. Without a complete government-sponsored safety net, it is but wishful thinking that an increase in personal incomes - if the stimulus plan achieves its desired goals - would automatically boost consumption.

Given the government's recent decision on deficit spending to ensure the success of the stimulus plan, it is high time for the central government to address the long overdue problem of socio-economic welfare system in China. After all, when people have to count on their own savings as their safety net, consumption is more a luxury than a necessity.

My reaction: This article highlights the importance of social security to boost Chinese consumption. Some points worth noting:

1) China has experienced excessive industrial expansion at the expense of consumption, as shown by its dropping consumption rate over the last three decades (from around 55 percent of the total GDP in the 1980s to merely 35 percent last year).

2) A major reason for the declining consumption is China's "insufficient socio-economic welfare system makes them feel insecure about healthcare, children's education, unexpected rainy days and eventual retirements." In other words, the failure of Chinese authorities to develop "national programs on healthcare, housing (subsidy) schemes, retirement, and social welfare" is responsible for China's dropping consumption.

3) A complete government-sponsored safety net is therefore necessary for China's stimulus plan to achieve its desired goal of boosting consumption.

I believe Chinese authorities are aware of the need for more Chinese social security to boost domestic consumption and are taking steps in that direction as shown in the two articles.

Chinaview reports that China plans to establish social security number system.

China plans to establish social security number system
www.chinaview.cn http://imgs.xinhuanet.com/icon/2006english/2007korea/space.gif2008-12-22 23:51:38

BEIJING, Dec. 22 (Xinhua) -- China announced plans Monday to establish a social security number system for the welfare of its citizens.

The draft of the social insurance law was discussed by the Standing Committee of the 11th National People's Congress, the country's top legislature, on Monday.

The draft said China would establish a standard social security number system across the nation by using each citizen's current identification card number.

The social insurance fund will be categorized into endowment insurance, medical insurance, insurance against injury at work, unemployment insurance and childbirth insurance, the draft said.

The draft also determined that a new type of rural medical system, in which farmers and governments raise funds together, would be included in the medical insurance.

Governments will cover medical insurance expenses for citizens who live on low-income subsidies, have serious disabilities or are older than 60 years, the draft said.

Beijing Daily reports that Social security insurance expands to rural China.

Social security insurance expands to rural China
Updated:2009-01-07 10:01 Editor:Xixiaodi

China's central government plans to extend its pension insurance to all urban workers. The government is also encouraging efforts to establish a pension system for the country's 900 million rural residents. Beijing is the first city to begin the system.

According to Beijing municipal Bureau of Labor and Social Security,
from 2009 anyone with a Beijing residential permit is entitled to join the pension insurance system, no matter whether they are from an urban or rural area. Governments at county and district levels will pay a basic pension of 280 yuan per month. Each pensioner is subject to pay at their will a certain percentage of their income into their pension account.

Sun Yan, Deputy Director of Beijing Bureau of Labor and Social Securities said "This time, we are taking down the barrier between urban and rural in Beijing, and establishing the most integrated pension system. The system includes pension insurance from State-owned enterprises and government organizations and covers everyone in urban and rural areas."

My reaction: China's move towards a social security number system seems fairly significant. In the US, social security numbers have an central pillar of our system of rating and extending consumer credit. So China's efforts to develop a social security number system, whether intended, might lead to easier consumer credit in China.


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0 Responses to China Expands Social Security

  1. Anonymous says:

    Would appreciate your comments on Chinese Electricity consumption. You are likely right longer term regarding Chinese inflation, but I am now a market skeptic on Chinese near term growth rate. Hugh Hendry has stated that greater than 50:50 chance that China GDP actually falls this year in nominal terms...
    http://seekingalpha.com/article/115318-forecasting-the-global-impact-of-this-crisis

  2. Richard says:

    It is possible that you are mistaken about China's hyperinflation.
    Let's assume that dollar's hyperinflation will start earlier of China's. Maybe current China macroeconomics built so that hyperinflation of dollar will have less effect on China itselt ?

  3. Yohay says:

    They managed to have solid banking systems before using this system, and with social security numbers they'll be even more stable.

  4. dashxdr says:

    So...although it's completely obvious that social security and medicaire in the US are bankrupt, or very shortly will be, it's a good thing for China to embark on its own version?

    What's so shocking is how incapable countries seem to be at learning from other countries' mistakes. Everyone has to learn the same lesson the hard way, it seems.

    If China wants to boost their own citizens' consumption, it's trivial. Simply let their currency float -- abandon their dollar peg. Suddenly their saving population will be wealthy. A lot of that money will burn holes in their pockets.

    Massive government programs in behalf of the people. Sheesh. China had a good thing going there for a while. Terrible to see them throwing it all away...

  5. Anonymous said...
    Would appreciate your comments on Chinese Electricity consumption. You are likely right longer term regarding Chinese inflation, but I am now a market skeptic on Chinese near term growth rate. Hugh Hendry has stated that greater than 50:50 chance that China GDP actually falls this year in nominal terms...
    http://seekingalpha.com/article/115318-forecasting-the-global-impact-of-this-crisis

    I had a look at Hugh's article, and I have to say he and I are on the opposite ends of the spectrum. I believe China will outperform nearly everyone, and Hugh seems to believe China will do worse than everyone.

    What Hugh is not considering is that China could boost its consumption rate (currently at suppressed 35 percent of GDP) and grow its domestic service economy to replace its shrinking industrial sector.

    ----------------------

    Richard said...
    It is possible that you are mistaken about China's hyperinflation.
    Let's assume that dollar's hyperinflation will start earlier of China's. Maybe current China macroeconomics built so that hyperinflation of dollar will have less effect on China itselt?

    If the dollar starts hyperinflating while the yuan is still pegged, this will weaken the yuan and increase China's trade surplus, putting even more pressure on China to drop the dollar.

    ----------------------

    January 20, 2009 12:21 AM
    Yohay said...
    They managed to have solid banking systems before using this system, and with social security numbers they'll be even more stable.

    yep

    ----------------------

    dashxdr said...
    Massive government programs in behalf of the people. Sheesh. China had a good thing going there for a while. Terrible to see them throwing it all away...

    I agree that China would be better off not adopting US style social security and medicare programs. That being said, I believe there is a healthier middle ground between America's oversized/unstable programs and China's current complete lack of any social security.

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