China’s model of state-capitalism won a constant stream of international accolades in recent years and would have been an exemplary model for other developing economies if not for a few blemishes the most glaring of which is that the sterling economic performance has been achieved at the expense of the well-being of its labour force.

As a proportion of GDP, personal income fell from a high of 65 percent in 1990 to 43 percent today. Worse, the distribution of that falling proportion of income has grown increasingly unequal. Latest data reveals that Gini coefficient in China has risen to 0.48. In recent years, the situation has been further aggravated by rising living costs caused not only by climbing food and fuel prices but also by vested interests and corruption as well as speculative and profiteering behaviour that further skewed market prices.

Inevitably, the living standards especially of the hapless low- and middle-income wage earners suffered and discontent began to mount. In response to the rising discontent, the government embarks on an inclusive growth strategy which will form the bedrock of the 12^th Five-Year Plan unveiled by Premier Wen Jiabao at the currently on-going NPC/CPPCC meetings held in Beijing.

In fact, efforts to mollify the discontent started long before the meetings. Many low-income wage earners, for example, are beneficiaries of a “minimum living-security” subsidy programme which has been extended to urban resident since 1999 and rural resident since 2007.  To help these beneficiaries cope with rising inflation, local governments have raised the subsidies and set up a mechanism linking relief payments with rises in local inflation. Since last year, government has also allowed wages to rise at a faster rate and promised that future income growth will be kept at least in line with inflation and growth in GDP.

Next, policymakers are also working hard to bridge the urban-rural income disparity, which rose steadily between early 1990s and 2004 to 3.4 and remained stable thereafter. The disparity can be partly attributed to the policy of “same labour with different remuneration” which causes rural workers to earn lesser than those in the cities. Already, government’s efforts are beginning to show results. In 2010, real per capita net income growth for rural residents was 10.9 percent compared to urban residents’ 7.8 percent.

Policymakers are also looking into issue of hukou registration that is preventing the 170 million migrant workers in the cities from enjoying the same welfare treatments as the locals. Chengdu, for example, has released a working plan to allow free migration of its residents between urban and rural areas starting 2012. More cities, especially those experiencing tightening labour supply, are likely to implement similar measures to attract migrant workers.

Besides helping to raise the overall income level, the government has also increased fiscal spending on social welfare and public services to alleviate the financial burdens of the poor.

In healthcare, for example, government unveiled a three-year 850 billion yuan plan to set up multi-layered health insurance policies and to carry out reform of public hospital with the aim to provide universal and affordable medical services to all the people. As a result of government’s efforts, individual’s medical bills as part of the total healthcare cost have declined from 52.21 percent in 2005 to 37 percent in 2010.

Next, to promote equal access to education, government increased scholarship funding and subsidies for needy students from 2.05 billion in 2006 to 26 billion yuan in 2010. In the cities, children of migrant workers may soon have access to free education. In the rural areas, local governments have also increased spending on improving schools and raising the quality of teachers.

Finally, the government’s most commendable effort to improve social fairness and build a harmonious society is without a doubt the recently announced public-housing programme. For the majority of the Chinese people who have been priced out of the property market, getting a public housing at heavily subsidized rates is a dream comes true. Over the next five years, 36 million units of public apartments will be built across the country for the benefit of 20 percent of the country’s urban households. Households in rural areas, on the other hand, will receive subsidies for carrying out home improvements. In 2011, the assistance programme will cover 1.5 million dilapidated rural houses.

Notably, current efforts to foster inclusiveness are built almost entirely on government transfers. Given that 70 percent of the population are classified as low-income earners, there is a limit of how much the government transfers can do especially in the long term. Already, with the central government picking up only 70 percent of the tab in urban areas, local governments in the less-developed central and western regions are stressed financially by the remaining 30 percent they have to come up with. Hence, the current approach based on government transfers is unsustainable. This is why long-term success of China’s inclusive-growth strategy hinges on the success of policymakers’ efforts in rebalancing and restructuring of the economy.

Rebalancing allows the government to shift from investing excessively in industrial activities to spending more on providing subsidized public housing, cheaper healthcare, better education, and other forms of social welfare.  This helps to reduce people’s precautionary savings and stimulate consumption which in turn drives the economy.

At the same time, as the economy restructures, Chinese companies capture more of the value-add churning out products using indigenous designs and technology. With the right policies in place this time, a higher share of that captured value can be apportioned to workers and equitably distributed to low- and middle-income earners.

In short, successes in rebalancing and restructuring of the economy will help to fuel and sustain the long-term inclusive growth of the economy. It will prevent China from degenerating into a welfare state driven by ever-mounting debts.

Policymakers also need to recognise that unequal distribution of income in China can be attributed in part to the lopsided elitist political system which spawns corruption that leads to social inequity. In the end, the state of true social equity and inclusiveness can be achieved not by incessant government transfers but by the creation of a level playing field so that end results depend more on efforts than on relationships. Political reforms are therefore also needed to put in place a fair system to ensure that social mobility is based on merits.

Of course, it is unrealistic to expect quick and dramatic changes given the size of the country and population. Inflation, for example, is set to continue its rising trend on the back of escalating food and fuel prices. Income disparity may continue to widen even in the long term as wages for professionals rise faster than those of the less-skilled workers and as regions with different endowments develop at different speeds.

Even so, there is no denying that the Chinese government has done a respectable job setting in motion a benign cycle of inclusive growth that has the potential to truly make life better this time not only for the rich but also the less-privileged masses.

Published in Straits Times/Review Section on March 08, 2011. Note that the published article may be slightly different due to ST’s editing.

Over the past two years, China’s money supply was boosted not only by the anti‐crisis stimulus released in late 2008 but also by spikes in bank lending, which amounted to

9.6 trillion yuan in 2009 and 7.95 trillion yuan in 2010, and by rising foreign exchange reserves which increased 18.7% to $2.85 trillion in 2010 as a result of surpluses in both the current and capital accounts.

The confluence of factors caused money supply to rise by 19.7 percent in 2010, exceeding the official target of 17 percent. The surge in liquidity in the two years was thought to have fanned the flames of inflation. Despite various efforts by policymakers to rein in inflation, property and food prices continued to surge.

Finally, when the CPI hit 5.1% in November last year, Chinese policymakers switched its monetary policy stance from moderately loose to prudent to mop up excess liquidity in the market and to manage inflation expectation. All in all, China raised the reserve requirement ratio six times and interest rates twice in 2010. With the latest hike on January 14, the ratio now stands at 19.5% with some analysts predicting it to hit as high as 23% in 2011.

Given that both the domestic and external economic outlooks remain uncertain and that Chinese economy is still very much investment driven, however, it is unrealistic to expect monetary policy to achieve the conflicting dual objectives of promoting economic growth and restructuring and at the same time reining in inflation. Monetary policy instruments are also too crude to be able to tackle specific and complex market imbalances without inflicting collateral damages on other sectors.

Already, bond analysts are projecting that borrowing cost for China’s banks will rise to

2.9 percent in the first quarter compared to the 2.75 percent in the previous while the corresponding one‐week US dollar Libor remains at 0.25 percent. With corporate demand for funds still remains strong, borrowing cost for businesses is set to rise. Worse, some firms may even see their funding cut off as policymakers continue to scrimp on money supply and restrict bank loans. Furthermore, the widening spread between the US and Chinese interest rates will lure even more capital into China, adding on to the inflationary pressure as well as the pressure for yuan to appreciate.

More pertinently, both the core inflation and asset inflation in China may be more than just a monetary phenomenon and therefore cannot be effectively addressed by monetary policy tools alone. Instead, imbalances within different sectors may be more effectively addressed with other sector‐specific microeconomic policies and administrative measures. In that regard, the practices of Singapore’s policymakers in containing asset inflation and core inflation may offer some valuable insights.

Public housing development in Singapore went through various phases. In the 1960s and 1970s, the Singapore government focused on providing the ballooning post‐war population with decent public housing, most of which on rental basis. By the 1980s, as income climbed, demand for better‐designed housing rose. The government Housing Development Board began building larger public apartments with better common amenities to meet rising expectations. Home‐ownership also became a norm. By the 1990s, property became more than just a roof over the head and more invested their excess savings on private properties.

Today, despite a vibrant private property market, public housing still accounts for 85% of all accommodations. More importantly, the high‐quality public housing also serves as price benchmarks for private properties. By pegging the price hikes of public housing to income growth and health of the overall economy, the government sets benchmarks that effectively restrain price growth for similar types of private properties.

In the case of China, a critical shortage of public housing supply to meet an insatiable demand from young urbanites forming families and migrant workers flooding into the cities results in scheming and profit‐maximizing private property developers gaining control over the market.

One simple trick commonly employed by developers to drive up property prices, for example, is to bid up the price of land so that the value of other plots they acquired earlier on also rises with the tide. As a result, developers hoard land and even completed apartments to profit from higher future land prices. While the local governments benefit from the higher revenue they received from land sales, the true cost is transferred to the society not only in terms of high property prices but also a concomitant rise in overall inflation. In the end, the runaway property prices and the shortage of public housing as alternative stoke fear in prospective homeowners who are forced to jump in despite the high prices. The free dealing and wheeling by speculators further accentuates that fear and accelerates the price rise.

Hence, in the absence of fair indicative prices, the combination of market imbalances, fear and greed set in motion a vicious cycle of incessantly rising property prices putting the dream of owning a house beyond the reach of the lower‐and middle‐income masses.

Benchmarking is again used by the Singapore government in controlling prices of daily necessities. This is done through the setting up of a chain of supermarkets by the National Trade Union Council (NTUC) in the form of non‐profit cooperatives owned by working‐class members. In Singapore, government‐led trade union activities have transcended from collective bargaining to actively improving the employability and living standards of the working class. Since its establishment in 1973, the supermarket chain has set out to bring high quality daily fares to its members at reasonable prices. Today, there is a NTUC supermarket at every corner around the island. By purchasing in bulk and bypassing the middlemen, NTUC is able to make handsome profits while still offering low prices to all customers as well as further discounts to members.

As a foreigner residing in China, it is bewildering that I have to buy some imported Chinese products from Singapore’s supermarkets every time I return home and bring them to Nanjing. They are not only cheaper than what I have to pay in Nanjing but also of better quality. Chinese consumers are not only deprived of better quality foreign goods but are also paying a higher price for inferior domestic products. Many of these products got onto the shelves simply because the manufacturers have agreed to pay a host of exorbitant fees charged by the supermarkets. In the end, these fees either result in declining product quality or higher prices for the consumers. Indeed, studies have shown that, in China, the greatest increase in prices takes place in the last rung of the distribution chain i.e. the retailers.

In Singapore, the benchmarking effect, in terms of price, product quality and operational efficiency, provided by NTUC proves more effective than any combinations of policies and rules to regulate the industry and to bring down prices of daily necessities. At the very least, it forces all competitors to be as cost efficient as NTUC in order to remain in the market. Clearly, the problem of rising core inflation in China is again more than just a monetary phenomenon.

The practices of benchmarking by Singapore government in trying to keep both asset inflation and core inflation at bay may not be relevant to China given the complexity of the Chinese economic environment. Notwithstanding so, they do demonstrate that by acting both as referees and players where needed, governments have the unique opportunity to introduce best practices and set benchmarks that can help markets function in an orderly and efficient manner.

In the case of China, inflation can be attributed not only to an oversupply of money but arguably more to other factors that lead to imbalances and inefficiencies. Given the sizable excess amount of liquidity in the market, monetary policy actions are indeed essential but insufficient to address those imbalances. As China transits into a more refined, not necessarily slower, stage of differentiated growth, the use of broad monetary policy tools increasingly need to be complemented by coordinated changes in other policy areas to resolve those imbalances in order to achieve lasting results.

In short, quick and broad macroeconomic policy actions are no panacea for the problems of rising inflation and market imbalances that China is currently facing just as rounds of aggressive fiscal stimulus and quantitative easing have so far failed to reverse the deflationary trend or revive the economy in the US.

Published in Straits Times/Review Section on January 24, 2011.


At the height of the global financial crisis, the Chinese government acted decisively by pumping four trillion yuan into the economy.

The bold rescue measures by the government succeeded in staving off widespread business failures and massive unemployment but fell short of generating internally-driven growth. Much to the world’s disappointment, domestic consumption in China today remains relatively subdued.

However, given China’s relentless push for urbanization and economic restructuring in the years ahead, there is certainly room for domestic economy to grow. One way it can undergo a sustained expansion is to embark on a massive public housing programme.

So far, public housing programmes implemented by many local governments have achieved only limited and varied success. Only six percent of urban Chinese families currently live in public housing.

The limited success can be attributed mainly to the central government’s hitherto emphasis on achieving high economic growth leading local officials to focus only on economic activities that contribute to GDP growth. What little motivation left to provide low-cost housing was further attenuated by corruption and by vested interests of local governments which depended heavily on land sales and private property development for their fiscal revenue.

Things are set to change, however, with the resolute switch from the “growth-at-all-costs” strategy to inclusive growth strategy as outlined in the recently announced 12^th Five‐year Plan (2011 – 2015). Public housing is a key investment area in the new five-year economic plan. With that switch, career advancement of public officials will increasingly be coupled with improvement of living standards rather than growth of GDP.

Already, many cities have stepped up their efforts. Shanghai’s supply of public housing, for example, will increase by 25% in 2011 to reach 15 million square metres. For China as a whole, the government is projected to have built 5.8 million units of affordable housing by the end of 2010. This figure is set to almost double to hit 10 million units in 2011. Altogether, the programme is projected to cost the government 700 billion yuan in 2010 and 1.3 trillion yuan in the following year.

These sizable annual fiscal spending will generate an explosion in demand for building materials, home furniture, and other related products and services with the ensuing multiplier effect driving the rest of the domestic economy. Given the government’s strong financial reserves, there is no doubt that this new impetus for internal growth can continue for at least the next ten to twenty years as China gravitates towards its target of urbanizing 70% of its population.

Besides generating internally-driven growth, the public housing programme also provides policymakers with a powerful countercyclical fiscal tool to complement the currently often‐used monetary tools (i.e. open-market operations, interest rates and reserves ratio) to manage the macro‐economy. In recessionary times, for example, the government can step up fiscal spending in the construction of public housing.

A successful public housing programme will also have an indelible impact on asset inflation. Despite years of efforts using predominantly monetary policy tools, the runaway property prices continue to scale new heights. Government’s efforts have been largely unsuccessful because asset inflation in China is more than just a monetary phenomenon and therefore cannot be effectively addressed by using only monetary tools.

The fact is that private housing in China has become an investment asset even before homeownership has become prevalent. The premature escalation of property from a roof over the head to an investment asset means that a larger proportion of the population are priced out of the market even before they have a chance to own one. Without government intervention, the pursuit of maximum profits by private developers inevitably results in market failure which causes misallocation of economic resources.

More importantly, an out-of control private property polarises the society as the rich are further enriched by property investment while the poor become even poorer relatively. By intervening directly, the government helps to fulfil an insatiable demand for affordable housing and at the same time provides a price benchmark for similar types of private properties.

Hence, the public housing program not only generates internally-driven growth, it also facilitates redistribution of wealth and allows the lower- and middle-income population to spend less on acquiring a house and have more left for other consumptions.

Finally, the development of public housing provides an opportunity for policymakers to revalue the yuan and speed up the restructuring of the economy.

Chinese policymakers have been unwilling to let yuan appreciate for fear of the social turmoil that can result from massive unemployment arising from closure of factories whose products are made uncompetitive by a higher yuan in the international market.

If the dislocated labour arising from yuan revaluation can be relocated to the public housing sector, then the government’s fear of any impending social turmoil can be assuaged. This creates more room over time for the yuan to appreciate which in turn helps to speed up structural reforms.

The overdue economic upgrading will raise across‐the‐board wages which, together with the higher purchasing power afforded by the stronger yuan, can further help to boost domestic consumption and substantially improve the quality of living for the low‐income masses.

In short, a successful public housing programme in the coming years will underpin Chinese policymakers’ efforts in stimulating domestic consumption and setting in motion a sustainable and benign cycle of internally-driven economic growth that economists and policymakers all over the world have been clamouring for.

Published in Straits Times/Review Section on January 13, 2011.

Many accolades have been sung about China’s economic success over the last three decades. Along with those tributes came the increasing hope that its high growth will help to pull the world economy along, now that developed countries are in economic slump, hence the talk of ‘reverse coupling’.

Of course, the realization of that tantalizing preposition falls first on the premises that China sees a sustained growth in its domestic consumption. However, despite the huge and timely stimulus injected by the Chinese government at the height of the global financial crisis, domestic consumption today remained relatively subdued. Given China’s relentless push for urbanization in the years ahead, there is certainly room for domestic economy to grow.

One way it can undergo a sustained expansion, for example, is to embark on a massive public housing programme. The multiplier effect from the construction activities will generate an explosion in demand for building materials and other related products and services. The impetus will be enough to drive strong domestic growth for many years to come. Besides helping to moderate rampant speculation in private properties, the public housing program also provides policymakers with a powerful countercyclical fiscal tool to complement the currently often‐used monetary tools (i.e. interest rates and reserves ratio) to manage the macro‐economy. More importantly, a successful public housing program helps to spread the fruit of economic growth more equitably and in the process mend the growing social divide as well as enhance political stability. Finally, the huge work force that is needed to build the public housing can help to absorb any dislocated labour in the event of a substantial revaluation of yuan.

The eventual reallocation of workers from low value‐add manufacturing activities to construction sector, in particular, offers several potential benefits. Firstly, it helps to alleviate Chinese government’s fear of any impending social turmoil that a substantial yuan revaluation can cause, thus leaving more room for the yuan to appreciate. More importantly, without the worry of massive unemployment, Chinese policymakers can have a freer hand to adopt policies that stimulate structural reforms. The overdue economic upgrading will raise across‐the‐board wages which, together with the higher purchasing power afforded by the stronger yuan, can help to boost domestic consumption and substantially improve the quality of living for the low‐income masses.

Despite the obvious benefits, however, public housing programmes implemented by many local governments have achieved only limited and varied success so far. One major problem is that China lacks an efficient administrative structure at the local levels to carry out such programmes on a massive scale. The problem is worsened by corruption which manifests itself in the form of vested interest linking public officials to private developers. In addition, private property development is also a large revenue generator for local governments. Hence, any efforts to promote public housing are likely to be attenuated by such vested interest.

However, with the resolute switch from “growth at all costs” to inclusive economic growth strategy as outlined in the recently announced 12^th Five‐year Plan, there is simmering hope that the coupling of career advancement of public officials with improvement of living standards rather than growth of GDP will in time yield feasible public housing development models that can be duplicated across the country. When that happens, China will be able to cruise along with internally driven‐growth that economists and policymakers all over the world have been clamouring for.

Having said that, it may be too simplistic to assume that an upsurge in Chinese domestic consumption will automatically translate into a tremendous spike in their imports. The American economy became the engine that pulled the world economy along over the past decades not only because of its unique privilege to print greenback at will. More pertinently, the gradual hollowing out of its industries dictates that US imports most of what they need. In contrast, China is far from being the case.

For a starter, much of what China needs can be satisfied with goods and services produced domestically. Today, China can produce an increasingly wide range of products without having to resort to import. Even though the quality of some of these domestically‐manufactured goods may not match that of imported goods, it will be acceptable for the relatively less discerning Chinese consumers. Hence, any expansion of domestic demand will only fuel further growth in scale and innovative capability of Chinese enterprises and transform them into increasingly formidable competitors in the global market. Furthermore, many foreign MNCs have relocated their production facilities in China to serve the domestic market. So, an increase in domestic demand only helps to churn up production at these Chinese facilities instead of creating more job opportunities in the developed countries.

The challenge for foreign SMEs trying to sell to China is especially daunting. With no production facilities located on Chinese soil, their ability to serve the Chinese consumers is greatly constrained. In addition, they will also face overwhelming obstacles in marketing and distributing their products to the Chinese consumers, not to mention the aggressive competition from Chinese manufacturers who have switched to selling to domestic market since 2009 in the aftermath of the financial meltdown and global recession. The Chinese distribution channels, for example, are already congested with Chinese‐made products, priced favourably and with improving quality. A visit to a store of any Chinese major supermarket chain will reveal that imported goods are not only more expensive but also harder to come by. A rise in yuan may help to bring down the price but the bigger problem is accessibility. Most Chinese supermarkets allocate only a few racks which occupy probably not more than 5% of the total floor space at each store. Besides the supermarkets, there are specialty stores that sell only imported products but the relatively low demand by Chinese consumers means that the products are usually priced beyond the means of ordinary Chinese folks and the exclusive stores are patronized mostly by foreigners.

Another problem with distribution is the unequal market power that supermarket chains enjoy. With so many producers contending for the limited shelf space, supermarkets are notorious for charging exorbitant entry fees and demanding long credit period from suppliers. In short, it is a different game with many hidden rules for foreign producers wanting to sell to China. Foreign SMEs, in particular, faced seemingly insurmountable obstacles given their lack of financial clout and market knowledge to navigate the cluttered maze.

In the end, most of the eventual increase in Chinese imports may fall in the following three classes of goods: commodities which China lacks, high tech and proprietary machineries and equipment in areas of technology that China still lags, and luxury goods which the increasingly wealthy middle‐class Chinese crave for. During President Hu Jintao’s recent visit to France, for example, the two countries signed deals amounting to €16 billion that involved China buying uranium, nuclear technology and more than 100 Airbus planes.

One silver lining is if the developed economies see strong recovery as a result of rising high‐tech exports to China, the rest of the world can resume selling to these developed economies. That prospect, however, is far from rosy, given the mounting government debts and the growing public’s resistance to reforms among the developed economies in the West. Also, the increased pace of global division of labour over the past two decades has seen some of the developed economies relinquishing a good portion of their manufacturing might to emerging economies, hence limiting their current and future capacity to sell to China. The British Prime Minister’s recent visit to China, for instance, yielded only a single contract selling Rolls‐Royce jet engines worth a meager sum of US$1.2 billion, despite being accompanied by an impressive entourage comprising of ministers and businessmen.

In the case of US, despite the aggressive monetary stimulus, growth has so far been elusive as industries struggle to create enough new jobs. With its higher cost structure, it is increasingly difficult for the US to recover manufacturing jobs that have been relinquished to emerging economies. Its hopes lie in new growth areas (e.g. green energy sector) or in high‐tech industries where the emerging economies have yet to build their competitive advantages. In other words, even if Chinese domestic consumption picks up, there is not much that the US can export to China. Even in high‐tech area, China is fast closing the gap. Already, China has overtaken US to clinch the top spot in supercomputer rankings with its Tianhe‐1A which has 1.4 times the horsepower of the US top computer it usurped. In the aerospace industry which has long been a stronghold of Boeing and Airbus, China’s state‐owned plane builder Commercial Aircraft Corp of China (Comac) made headlines recently with its announcement of 100‐plane order from mostly Chinese airlines.

Given China’s interminable supply of both skilled and unskilled labour, increasingly sophisticated infrastructures, and the impending quicker pace of industrial upgrading, its capacity to grow across industrial clusters will be unmatchable both in terms of scales, depths and capabilities. Even though the world economy will continue to expand in the years ahead, it appears probable that China will chomp off an increasingly growing share of the global economic pie. Even if yuan appreciates substantially, Chinese exports may still be able to maintain their competitiveness as a result of rise in productivity. In the coming years, Chinese firms are likely to benefit from internal economies of scale as firms continue to expand output in respond to expanding domestic consumption; external economies of scale as industrial clusters mature and deepen; increase in productivity as the relentless push for R&D bears fruit and new technologies are adopted; and new growth impetus as structural reforms are unleashed. Countries may find it harder to sell to China while becoming more dependent on the cheaper Chinese imports. This constitutes neither an encouraging nor a sustainable scenario for global trades which could evolve to become ever more a zero‐sum game for all.

In short, even though the Chinese domestic consumption may pick up, the hope of reverse coupling between the Chinese and the global economy may remain in the end just a figment of wishful imagination.

Published in Straits Times/Review Section on December 30, 2010.