February 24,2011

What China Can Learn from Jasmine Revolutions

By Lu Ting,Hong Kong

What and how would the Jasmine Revolutions in the Middle East and North Africa impact on China? As economists we will just focus on the economic impacts by believing that the chance for any major social unrest in China is extremely small thanks to China's high GDP growth, high wage growth for unprivileged young workers and the push on redistribution programs such as social housing. On policy impacts, while taming inflation is still a priority, we believe China will take measures to maintain "stable and relatively fast" growth to both create jobs and narrow income inequality, to resolutely curb home prices to narrow wealth inequality, to strengthen some pro-growth redistribution programs such as social housing, and to reduce its dependence on oil imports.

Growth, youth employment and income inequality

Many participants in the Jasmine Revolutions in the Middle East and North Africa are unemployed youth equipped with better education and access to modern media. They need jobs, and they loathe the ever widening income inequality. The lesson for China is that growth is still the predominant priority for China because growth both creates jobs and narrows income inequality. In China, rapid economic growth now could narrow income inequality as previously low-paid migrant workers received a 19.3% pay raise last year and could get another 20% wage increase this year. In contrast, income growth for the middle-class may only be in single digits. The major factor behind this differentiating income growth is the changing demographics and depletion of surplus labor in China.

We believe Beijing has no intention to significantly slow the economy if inflation does not significantly deteriorate further. Even inflation has to pick up on surging oil prices, Beijing might believe it's a result of supply shortage and could show greater tolerance on that.

Wealth effect, home prices and social housing

China's wealth inequality has been widening, driven partially by surging property prices. That's why China has been so tough in reining in home prices since April 2010 and has been so serious in pushing forward social housing programs. In the forthcoming NPC meeting in early March, China will provide further details on how to raise labor income and redistribute wealth to build a more harmonious society.

Oil prices, energy security and energy policies

Chinese policymakers are now deeply concerned about the country's dependence on oil imports and its energy security as oil prices surged to above US$100bn. Oil imports made up 54% (up from 52.5% in 2009) of China's total oil consumption in 2010. That's why the government has scrapped most subsidies on auto purchases, hiked fuel prices twice since Nov last year, and is making a big push on alternative energy in China.



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