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China economy: Barriers to building a "new socialist countryside"(EIU Viewswire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT Reducing income inequality and achieving more balanced economic growth are the main themes of the fourth session of China's Tenth National People's Congress (NPC), being held in Beijing from March 5th-14th. These themes, embodied in the 11th Five-Year Plan (FYP) that the NPC will formally endorse, have taken on particular importance to the central government given the exposure in recent years of the negative side-effects of China's "growth at all costs" strategy, which have contributed to growing social tensions. Reducing the burden on the rural populationbuilding a "new socialist countryside"is seen as the key to easing these tensions. But the piecemeal nature of the initiatives announced so far suggests the impact on China's rural residents, at least in the short term, will be limited. Rural burden Some two-thirds of China's 1.3bn people still live outside major urban centres, and almost half earn their living there. Yet rural areas have profited least from the economic boom of recent years, partly because of the extremely low productivity of agricultural work (although agricultural production accounted for 47% of total nationwide employment in 2004, it accounted for only 15.2% of GDP). The disparity between urban and rural incomes is large: annual per-capita disposable income in urban areas in 2005 was Rmb10,493 (US$1,280), but in rural areas it was only Rmb3,25531% of the urban figure. Efforts to address this gap have not stopped it widening. Last year income growth per head in rural areas averaged only 6.2%, against average urban income growth of 9.6%. While urban (and principally eastern, coastal) regions have benefitted from the economic reforms of the past two decades, the burden on rural residents has increased. This is partly because the central government has been spending less and less on welfare provision as its role in the economy has diminished, but impoverished regional governments have been unable to take up the slack. Total public expenditure on health, education, culture and science is now proportionately very low: the OECD has noted with concern that such spending amounted to just 5.5% of GDP in 2002, against an average of 28.2% in OECD nations. Moreover, this spending is very unevenly distributed between regions, with rural residents receiving the least. In his keynote work report speech to the NPC on March 5th China's premier, Wen Jiabao, emphasised the importance of increasing rural incomes. This is seen as crucial to easing social pressures that have led to rising unrest in recent years. The latest official statistics, released in January, show a 6.6% increase during 2005 in the number of protests involving 15 or more people, to 87,000. The number of people taking part in social protests also increased in 2005, to 3.8m. Promoting more balanced economic development, in particular by investing in infrastructure, welfare and public services in rural regions, is seen as key to reversing this trend. Tax less, spend more Improving the lot of China's rural residents has been a focus of central government policy for some time, with various initiativesto reduce the rural tax burden, boost agricultural production and investment, and improve welfare provisionstested and launched in recent years. However, since the announcement of the 11th FYP last October there has been a new rhetorical emphasis on such plans, culminating in the run-up to the NPC with references to "building a new socialist countryside". Mr Wen continued this grandiose theme in his work report, commenting on the "epoch-making significance" of certain policiesparticularly the abolition from January 1st this year of an agricultural tax the government claimed had been levied for 2,600 years. Beijing has also made much of its plans to boost spending in rural areas. In total, according to Mr Wen, the central government will spend Rmb339.7bn (US$42.3bn) on agriculture, rural areas and farmers this year, an increase of 14% from last year. Some of this extra spending will go towards enhancing subsidiesincluding an extra Rmb1bn in 2006 to stabilise grain priceswhile much will go on increased infrastructure investment. Welfare spending is also set to rise significantly. The government plans to end rural tuition fees for compulsory education within two years, with the central government's education budget set to rise by Rmb218bn nationwide over the next five years. There will also be more money for rural healthcare, which is a particular challenge (and hindrance to economic growth) as over 80% of rural residents currently lack any kind of health insurance. The authorities have been testing a scheme in which the central government, local government and residents each contribute Rmb10 (US$1.25) to a common fund to pay for medical expenses. This will be broadened to cover 40% of China's 2,000 counties this year, with the official contribution to be doubled to Rmb40 per person, costing Rmb4.2bn in 2006. Rmb20bn has also been promised over then next five years to renovate hospitals in townships and counties nationwide. Underfunded The actual impact of these measures on rural China is not likely to be substantial, with the fiscal boost less impressive than the official rhetoric would suggest. Total spending on agriculture, rural areas and farmers will account for a greater proportion of the centre's total budgeted expenditure in 2006, as this is set to grow only 9.7% this year to Rmb2.22trn (US$276bn). But the 14% increase in such spending does not reflect record central government revenues, which have grown by 16-20% in each of the last four years. It is also less than the planned 15% rise in the defence budget in 2006 (although the nominal sum is larger). The net fiscal transfer to the countryside this year is underwhelming considering the number of people it is meant to help. Given that the extent to which the tax reductions and abolitions have been implemented is uncertain, and that it is not clear how much of the new education spending (of roughly Rmb44bn annually) will be diverted to rural areas, it is difficult to calculate how much extra funding rural areas will receive in 2006. Even if all the extra funding mentioned above goes towards rural residentswhich is highly unlikely as a substantial proportion of the tax cuts has already been implemented and some of the education funding is likely to be spent in urban areasthe total extra funding would be worth around Rmb200bn, roughly 1% of GDP or an extra Rmb265 for each rural resident. The measures do suggest that the central government is attempting to take on more of the welfare burden from cash-strapped local governments, but the amount of extra spending is still minuscule compared to the enormous cost that would be incurred if Beijing took responsibility for all rural health and compulsory education costs. The relative modesty of its programme partly reflects the constraints imposed by a tightening fiscal bias. China has been implementing an expansionary fiscal policy since the end of the Asian financial crisis in 1998, but given concerns about unproductive investment it has been changing its stance in recent years. The government has budgeted for the fiscal deficit to fall by about 1.7% this year, despite the rise in overall spending. Regional inertia Throwing money at the countryside will not solve problems with the disbursement of funds or with the implementation of central government directives by the regional authorities. Previous spending initiatives have not had the desired impact due to significant "leakage", partly the result of pervasive corruption at local levels. Although eradicating corruption has been a major theme of government policy in recent yearsand has remained a focus at the NPCit remains a problem. There will also be conflicts over the reduction of direct tax income to local governments, which will be forced to raise funds for mandatory spending (on unavoidable infrastructure projects, for example) in other ways, increasing the implicit burden on rural residents. Beijing has said it intends to divert infrastructure-development funds away from urban areas to the regions. The impact of this could be significant: of the Rmb179bn in fixed-asset investment recorded in Heilongjiang province in 2005, for example, over 90% was spent in urban areas. But getting local authorities to increase the rural share of this spending will be difficult, as it will depend on convincing them to divert resources from high-growth areas to less productive ones, where the potential returns on such investment are much smaller. Beijing has had similar problems getting regional governments to hew to its "sustainable growth" line, embodied in the 11th FYP, as evidenced by continued warnings from Mr Wen and other officials at the NPC about excess investment in sectors already threatened with overcapacitysuch as coal mining and steel production. This is partly because local officials get tax income based on local output, and because local GDP growth is used as a measure of performance in assessments for promotion. Deeper reform needed The strategies outlined at the NPC seem unlikely to make much headway in transforming rural China. More substantial development relies on deeper reforms, particularly to land rights, that the government is unwilling to implement quickly (if at all). Land-rights conflicts have been at the root of much of the social unrest in China in recent years, particularly where agricultural land has been seized by developers (sometimes in collusion with local authorities) and reclassified for sale at a significant profitoften with inadequate compensation paid to the previous tenants. At the NPC meeting Mr Wen referred to this problem in an oblique fashion, saying: "We must respect farmers' wishes and avoid formalism and coercive orders." Cracking down on corruption is one way of preventing this type of abuse, but it will not remove the constraints on rural income growth that various restrictive regulations impose. Currently rural residents, unlike those in the cities, may not buy or sell land, although they can lease usage rights for the land they occupy (and may sell these rights). But the limited nature of the usage rights means farmers are unable to diversify to more profitable, non-agricultural industries. Moreover, their ability to migrate to the cities to work is still impeded by the hukou system of household registration, which places constraints on labour-market flexibility. In general, the financial system is also biased against lending to rural residents, driving up the cost of black-market borrowing in the regions and hindering entrepreneurial development. Easing these constraints will be crucial for increasing the output of rural areasand hence raising rural incomes. The government admits that its policies during the term of the 11th FYP will not be able to reduce the urban-rural income disparity. By 2010, according to estimates made at the NPC by Ma Kai, head of the National Development and Reform Commission, average urban per-capita disposable income will be Rmb13,390 (US$1,650), while rural per capita net income will be Rmb4,150still just 31% of the urban total. At least by recognising the importance of rural welfare and prioritising the development of rural regions, the disparity is not expected to get any wider. But taking the next step, to remove the barriers to sustained growth of rural incomes, is still a long way off. SOURCE: ViewsWire Asia |