In the process of learning about China’s economic development, I often wonder if it was the right policy for China to cut its domestic spending on public services to suppress its currency while exporting most of its capital surplus to the West. Even in pure economic term, shouldn't economic growth equivalent with improvement of social welfare and income distribution? The answer is obvious- there is no promise of such upgrading even in an economy that has been growing at a rapid rate like China. After the Asian financial crisis in the late 90s, the Chinese government together with the rest of the Asia Pacific decided to protect its economy by maintaining a huge amount of reserves in foreign currency and bonds which ended up injecting an enormous capital inflows toward the US and Europe market causing an unprecedented equity bubbles. Ironically, together they became the partial cause of the current global financial crisis.
Last Thursday, Premier Wen Jiabao announced that China expects to meet it goal of 8% growth rate this year despite their declining economic performance. What did he have in mind to secure such ambitious growth rate?
To supplement for the fast decline in exports, the government has allocated $585bn (almost equivalent to 3% GDP) toward domestic spending and investment for the next 2 years. A big portion of this stimulus package will be spent on improving China deteriorating infrastructure especially on the national railway network. “Many economists believe such heavy infrastructure investment will delay the much-needed shift in China’s growth model towards domestic consumption and services, which would be more sustainable in both economic and environmental terms,” said Geoff Dyer of the Financial Times. I have some disagreements with this opinion.
While improving infrastructure will not give Chinese economy a quick boost in domestic consumption, it is of crucial advantage for China long-term growth. On one hand, the plan will enhance long-term development and improvement in the public service by providing transporting access to the remote regions of the country. Investment in heavy infrastructure will also lay a firm foundation to boost domestic consumption in the long term once local economy picks up. Next, improved infrastructure could further attract more foreign direct investment into the interior regions of the country where labor is still abundantly cheap. This will in turn further help to bridge the gap of regional and social differentiation rooted deeply in China's experimenting economic strategy.
Besides, the stimulus bill doesn’t disregard the need to stimulate domestic consumption all together. Some parts of the $585bn are expected to add an additional 24% to education, 38% to health care and 171% in investment for low-income housing this year.
With increasing lay offs from the country’s export processing zones, slumping economy and the tradition of holding high saving rate, it is challenging for the Chinese government to boost domestic consumption in a short term. By allocating money to infrastructure, the government will at least mitigate a portion of workers to construction industry and offset some parts of the growing unemployed labor force. More importantly, improvements of infrastructure and public services are particularly vital for China’s sustainable and long-term development. With much criticism, a part of this stimulus plan appears to hold credible value.