The leadership acknowledged this problem at the recent National PeopleÆs Congress (the annual convention of ChinaÆs top legislative body) and are taking some major steps to rectify it. Priority will be given to inland rural China, environmental protection and social harmony over coastal, urban China.
The national agricultural tax has also been eliminated to help improve the living standards in rural communities, where more than 64 million people (equivalent to the UKÆs entire population) live on less than $120 per year. New medical care systems and free compulsory education have also been introduced. Almost Rmb218 billion ($28 billion) will be invested in rural areas over the next five years.
The energy industry is an important example of this strategy of moving away from ægrowth at any costÆ to sustainable development. The government is aiming to reduce energy consumption per unit of output by 20%. Excessive use of cheap energy has caused overcapacity and pollution in China, so the government is lifting prices and curtailing investments in energy intensive sectors such as aluminium smelting.
Small cars are being promoted, a complete reversal of the previous policy where small cars were previously banned from major city thoroughfares. Through the Renewable Energy Law, legislation is also in place to promote wind, solar, small hydro and other renewable energies to the tune of 100GW by 2020. About $1 billion is going into wind power alone.
Small, off-grid plants will help the 20-30 million farmers cut off from the main grid. Nuclear energy will be the most important, contributing 40GW of that 2020 target.
Another big change of focus is water. China is facing a water crisis, with 300 million people not having access to drinkable water. About 28% of the rivers and lakes are polluted and the sewage plants sometimes donÆt work. Water is practically free in many areas, and the government will have to raise prices. One major initiative is the $62 billion south-north water pipeline to take water from the water-rich south to the parched north.
What impact will higher prices have on the farmers?
ItÆs not clear how the government is going to go about this. They could raise water prices but increase other subsidies to compensate.
Given these huge investments, how realistic is a rebalancing of the economy away from fixed asset investment towards consumption?
This is ægoodÆ fixed asset investment! ItÆs not going towards producing over-capacity. ItÆs going towards projects essential for sustainable growth.
But the point about increasing consumption is valid, and itÆs linked to the whole idea of boosting earnings and consumption in rural areas. The reason consumption is so weak is not because of the cities, where income growth is 10-15% per year and retail sales growth is 12-15% per year; itÆs because of the low incomes of the 800 million farmers, where income growth is only 5% per year. Boosting their contribution towards consumption is still crucial.
Ultimately, how realistic is this? China has built a world-beating manufacturing sector to ensure growth and jobs for its people. Is the government ready to shackle this sector through higher fuel and water prices?
This would be a good thing for the manufacturing sector. It would force out the smaller players who are contributing to overcapacity, and stimulate consolidation. They will have to be more efficient and productive to ensure adequate returns. But this is a three to five year trend; it wonÆt happen overnight.
Would the government consider it a bonus that higher costs could reduce the mega trade surplus with the US?
The government is not in favour of the trade surplus. In any case, there are so many different variables affecting the surplus, such as the size of ChinaÆs imports and US demand for Chinese goods. But exports are clearly vital to China, which is the third biggest trading nation in the world and a bigger exporter than Japan, with an economy one third its size.
Given ChinaÆs large export component to GDP are you worried by ever-fiercer US calls to revalue the currency, which could dampen export growth? In retrospect, was the currency revaluation last year just for show, a short-term plan to relieve political pressure?
The re-valuation was not for show. The government is introducing flexibility over the longer-term. ThatÆs very clearly the plan.
To what extent are these initiatives actually new, rather than efforts to buttress policies which have been in place for a long time but which havenÆt been especially successful. IÆm thinking of the æGo WestÆ and the strategy for opening up the Northeast. How are these strategies performing?
These policies have only been underway since the new leadership came to power just over two years ago. They need time.
What chance do the water-parched inland provinces - cut off from the sea, with low income levels - really have of taking off economically and achieving sustainability? Is the ultimate aim to have a heavily subsidized farming sector like in Western Europe?
China canÆt afford to subsidize the farming sector to European levels. The government will need to create rural industries and manage the migration process to the cities. This latter aspect, providing accommodation, education and health care to the new arrivals in the cities, will be very important. Land is also a critical issue and land ownership issues are seeing progress. Farmers now can rent their land to third parties when they go off to the cities, thereby ensuring a minimum livelihood.
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