Plan for Next Five Years Must Free Up Disposable Income

The government's 12th Five-Year Plan concludes this year, and work on drafting the 13th will begin soon.

Which way will China turn? In its work report to legislators at the National People's Congress meeting in March, the government pledged to create a development blueprint in the spirit of reform and innovation, yet grounded in facts. The actual drafting is expected to begin in early summer, with a version ready for review by the Central Committee at its Fifth Plenum in the autumn.

The highlight of the blueprint, which will chart the country's development from 2016 to 2020, will no doubt be the leadership's strategy to stabilize economic growth and, in particular, boost domestic consumption, widely seen as the next major engine of growth.

For nearly two decades, the government has sought to transform the country's growth model from one based on intensive investment to one focused on raising productivity and efficiency. Many experts have also called for a greater reliance on the services industries and consumption for growth. But such ambitions have proved hard to realize; in 2012, the share of household consumption in fact dropped, to 29 percent of GDP. Coupled with a high investment-GDP ratio, such growth is unsustainable.

The downward pressures on the economy are growing. The ostensible reason is a decline in investment, but the true reason is weak domestic demand, since as much as two-thirds of all investments support consumption.

By contrast, savings are high. Total savings reached 50 percent of GDP by 2007 and have yet to drop. These days, when the economy is slowing from its breakneck pace, there is an urgent need to strengthen consumption and lower the savings rate.

How do we explain such high savings rates? Various reasons have been offered: people save up because of inadequate social security; they need a lump sum for housing down payments, given the rudimentary mortgage financing available; the workforce population is huge relative to other countries, and people who work save more; state-owned enterprises tend to save rather than invest; Chinese save because of the traditional virtue of thrift.

In reality, a combination of these factors is at play. This means any solution must be comprehensive.

One thing is clear: to boost local demand, we must raise household disposable income. This means raising the share of household income in total national income, which in turn requires a comprehensive reform of the administration to make things simpler and less restrictive.

In October, the State Council proposed promoting consumption in six sectors: information technology services, such as e-commerce; green industries; stable and low-income housing; travel and leisure industries; education and sports industries; and industries that support healthy aging such as elderly care services.

Most of these industries are in the services sector. For many of them, demand has already outstripped supply. To increase supply, in many cases, the government must ease the administrative bottlenecks blocking development.

Take education. Last year, some 460,000 Chinese left the country for overseas studies—yet another record—and those who left are younger than before. The local education sectors should see this as a pool of demand waiting to be tapped.

In health care, an overhaul is needed to address the twin problems of lack of access and high costs.

In financial services, though the value-added ratio of the industry has already reached 7 percent of GDP, similar to that in the United States, China is still lagging in terms of product design, pricing and risk protection, not to mention its inadequate regulatory oversight.

Overall, there also needs to be a mindset change. Many Chinese regard services, especially those in the lifestyle businesses, as less viable than those more directly related to manufacturing. This bias must be corrected if the services sector is to grow.

Consumption patterns are also changing. With the rise in income and the popularization of mobile electronic devices, consumption has become more diversified. Many have observed that in today's China the consumption habits of the middle class will inevitably be shaped by the choices of high-income groups. Likewise, those in the low-income strata may also look to the consumption trends of the middle class. As such, society must begin to get used to a more conspicuous display of wealth by the rich, and learn to manage the envy that comes with it. If it does not, the wealthy will simply choose to spend their money abroad.

Every Spring Festival, Chinese with means travel abroad for shopping and leisure. This is no longer news. If the government is serious about boosting domestic consumption, it must consider ways to encourage its citizens to spend their money without any worry.