From Guangzhou, China

This time around, I traveled quite extensive in southern part of China, venturing beyond my normal hunt in Guangzhou. I covered south of Guangzhou – Dongguan before heading to Fujian province. Noticeably that development outside the urban areas has been non-linear.

Interestingly, income growth for rural households in recent years has become much more solid than urban household income under the administration of President Hu-Premier Wen era. Going even deeper beneath the surface, I notice that farm income of rural households is rapidly being supplemented with income from both industry and construction. This compared to period of 1998-2002 President Jiang-Premier Zhu period, which such supplementary income had been virtually non-existence.

These shifts do not happen naturally and these are the economic side-effects of the 1990s policy model, which had a huge urban bias, driven by technocratic goals. The 1990s policy model had seen the increased dependency on the external sector and an investment-driven growth model. Another troubling issue was that China is among the most unequal societies in the world as measured by the Gini coefficient. In the 1990s, the Chinese states systematically favoured foreign firms at the expense of indigenous, largely rural-based entrepreneurs. It is no surprise that foreign firms account for over half of imports and exports. At approximately US$500bn and US$600bn, the domestic value-added of these exports could be as low as 20%.

Into the future, growth will be much centered on consumption as principal engine of the economy. Surveys show that young Chinese – the post-80s generations – consumers are attractive segment – not only due to its sheer size, but also because they have a taste for material things, are optimistic about the future and are socially active. Boosting consumption will be a multi-year effort for the government and consumption subsidies are just the start.

Consumption subsidies will continue to be expanded but the next range of policies is to boost income of the low income segment as they have the most pent-up demand and represent the largest part of the population. Various cities have already announced plans to raise minimum wages for 2010, ranging from 10-15% respectively. The minimum purchase price for key crops is likely to be raised again. Government has already expanded the scope and categories for the rural subsidy program and total home appliance sold through the subsidy program last year reached RMB65bn. The next step for the government’s appliance subsidy program could be a possible raise of maximum subsidy cap. High price items should benefit the most such s TV, air-cond, refrigerator, washing machine and PC.

The Chinese government is often pressed to ‘rebalance’ its economy. Usually, this is a code word for currency appreciation.