In China, Fast Economic Growth Does Not Equal Household Wealth

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Over the past 30 years of reform and opening up, China

 

Measured in GDP, Chinese people can produce a new 1978 China every two years, a current Korea every 10 years, a Canada every 11 years, a France at every 19 years, a Britain at every 22 years, and a Germany at every 26 years. While the net assets of residents in major developed countries are equivalent of 4 to 5 times their GDP, Chinese citizens' net assets of are only equivalent of under twice GDP, far below developed world standards.

 

Some attribute this lack of wealth to low per capita GDP and economic development. But China's per capita GDP nowadays is similar to that of the US in 1972 (in terms of purchasing power parity), when US residents' net assets totaled 3.5 times GDP. The wealth of Chinese citizens has great room for growth.

 

Uneven distribution of national income between the government, enterprises and residents is the main reason for the low level of wealth. As over the past 30 years state-owned enterprises have accumulated huge profits through monopoly power, China's economy has grown fast, but the economic results have not been equally shared. SOEs reap high profits and the government maintains relatively high tax rates, but wealth transfers to residents have lagged. For many years, growth of government's fiscal revenue and corporate profits have significantly out-paced residents' income, leading to a continuous decline of the proportion of workers' compensation to GDP, from 53% in 1998 to the present 39%, far below than 56% of the US.

 

Asset price volatility has also contributed to the lag of the wealth growth in China. Data show that people's financial asset structure is deformed, i.e. mostly in the form of bank deposits. Bank deposits in China not only do not increase in value, they do not even preserve value. Deposit interest rates are out-run by CPI. The real value of one yuan deposited in 2003 equals only 0.985 yuan five years later, measured by real interest rates (nominal interest rates less currency expansion rate), with a depreciation of 1.5%. People focusing on savings as their main financial asset do not gain wealth growth. It is, however, beneficial for the government, because the massive pile of bank deposits can be used for loans on a massive scale. China is capable of extending huge amounts of credit to promote investment and respond to financial crises. China's stock market is a "policy market," full of ups und downs, and the returns in stock market after risk adjustment is still lower than bank deposit rates.

 

The result is that the wealth of Chinese residents can not receive due value consistent with economic development level and the contribution of ordinary people. This inhibits citizens' consumption desire. Inflation may well rise from the current -0.5% to 3.5% in 2010, up 400 basis points, leaving bank deposit rates well back in the dust, further depressing any desire to spend. 

 

The government should create more investment channels and property income for residents, extract dividend payments from SOEs, reduce taxes, increase transfer payments to the residents, promote the distribution of economic fruits more equally to citizens, and provide wealth appreciation channels, so that it can help promote private consumption, reduce the imbalance of investment/consumption ratio, all conducive to China's economic growth.

 

(The author is chief economist of China International Capital Corporation)