China: Second Best or No. 1 in Waiting?

China is the 2nd largest economy after the US. China has boosted its prolific growth rate of 10% mainly through exports. From dolls to iphones, the ‘Made in China’ tag is a mainstay. The cost of utilities, and buildings are higher in China, than the US. However, labour costs are incredibly low, at about $177 for a month compared to $17 per hour of a US worker of comparable skills.

A global economic slowdown, particularly in Europe is making China look into domestic consumption. This can be raised by boosting wages. In the pipeline are housing projects in rural areas. The divide between rural and urban China stays wide. In the hope of more equitable growth China is looking at its domestic market. In addition to this China is making investments and setting up plants in countries like the US. Luxury condos, yard spaces, offices, treasury bonds, green technology are all the items on the Chinese shopping list in the US.

Chinese Vice Premier Hui Liangyu believes China needs to deepen reforms especially in rural areas and in its opening up policy. He felt the unbalanced allocation of public resources has widened the pace of economic and financial well being of rural and urban areas. He said areas of focus should include township governments and institutions, rural areas' compulsory education system and funding management mechanism. He added the importance of focusing on agricultural technology, enhancing the prevention and control of animal and plant epidemics and improving the quality and safety of agricultural products.

In order to shift focus from low demand in exports to domestic consumption and reduce urban rural disparity China has rolled out some measures starting 2009.

• To halve purchase tax on cars under 1.6 liters to 5 percent.
•  The government expanded the subsidy program for rural purchase of home appliance throughout the country in February 2009.
• A 10% subsidy on the purchase price of mini vans and light trucks for rural residents, and a 13% price back on the purchase of motorcycles by farmers
• China has allocated 2 billion yuan to help home owners replace home appliances
• A subsidy of 10 % of the retail price of new appliances including TVs, refrigerators, washing machines, air conditioners and computers has been provided.
• The government announced subsidies to farmers to increase output of grain, potato, highland barley and peanut as well as to purchase agricultural machinery and construction materials.
• China plans to begin construction or renovation on at least 7 million housing units for low-income groups next year, Minister of Housing and Urban-Rural Development Jiang Weixin said. This includes both newly-built subsidized housing units and houses in run-down areas that will undergo renovation. 5 million housing units are expected to be up by 2012. Residents' reasonable demand for house buying will be supported and priority will be given to meeting the first-time buyers' need for loans
• The Peoples Bank of China (China’s Central Bank) reduced the required reserve ratio by 0.5% to increase liquidity and boost domestic consumption.

(source: gov.cn)

China feels that it needs to maintain a GDP growth of 8-9% to sustain itself. China realizes 2012 is not going to be a year of high growth from exports. While China has slowed down from its 10% growth rate it will be looking at boosting domestic growth by reducing rural-urban inequities. Reduced demand from Europe, one of China’s main markets is going to be used as a period of economic restructuring by China. It has prudently been investing in countries of interest. In the long term when the global economy moves out from recession the Chinese dragon will roar.