Economic crisis could push reform in China

Still, such policy steps can only provide a short-term boost. More fundamentally, unless state- and collective-owned land and state assets are privatised, it’s hard to see how stimulus efforts can transform the investment- and export-oriented economic structure.

China’s private consumption has failed to grow, but not because Chinese consumers don’t like spending. Rather, it’s because most don’t own property and, even though both the economy and asset values have been growing fast, most households don’t feel any wealth effect. According to my compilation of official statistics, the Chinese government owns about three quarters of the country’s productive wealth. For most consumers, wages are their only source of income. And this single income source has grown at a pace far lower than GDP growth rate. Without more and spreading private ownership of assets, there’s not enough wealth effect to boost consumption and private savings pressure will necessarily remain high.

For the past 30 years, as the economy continued to benefit from globalisation and stayed on the high-growth path, there was insufficient pressure for China to undertake privatisation reforms by equally distributing the remaining state assets to its 1.3 billion citizens. Yes, privatisation has taken place in China, but through selling shares of state-owned enterprises at a price. This means relatively few could buy and all proceeds went into the Ministry of Finance. Therefore, previous methods of privatisation had little, if any, effect on domestic consumption.

This explains why China has had a strong desire to reduce its dependence on both investment and export for more than a decade, but only managed to see this dependence rise.

The ongoing global crisis may provide new impetus for reform. In late October, the central government announced a land-reform policy to allow peasants to trade or mortgage land-use rights. In particular, the government will make efforts to organise land-use right markets and facilitate trading in such rights. While not outright land privatisation, this reform is a major step in the right direction that can make peasants wealthier and unleash new consumption demand in the countryside.

Another possibility is putting the remaining state assets into national wealth funds and distributing the fund shares equally among Chinese citizens. After all, state assets belong to the people. Returning the ownership rights of these assets to the citizens at no cost is perfectly consistent with the very logic of state ownership. If this happens, the financial crisis-induced reforms could position China for another period of high growth. In this sense, the crisis can turn out to be a positive opportunity for China.