Wen Jiabao’s Troubled Macro Adjustment: Officialdom gains weight at the people’s expense – Liang Jing

Thanks to David Kelly for this translation:

In the PRC, all who pay attention to the economic situation can see ever more clearly that Wen Jiabao’s macro adjustment has not achieved its anticipated effect. The speed of investment growth still shows no sign of dropping, while the proportion of expenditure by residents continues to fall. For the people, what is easiest to see is the total defeat of government attempts to suppress housing prices. On November 5, Jiang Wanrong, Deputy Director of the Real Estate Department Bureau of the Ministry of Construction was forced to admit in a public lecture that the effects of the real estate macro-adjustment were “preliminary and unstable, and price rise pressure on housing in some localities was still great”.

In such a situation, critical voices are appearing more and more boldly in the media. In the last week Ren Zhiqiang, a real estate big shot who always dares to speak out, has once again becomes the darling of the media. The core of Ren’s opinion this time was basically to challenge the rationality of Wen Jiabao’s suppression of housing price rises. Ren’s core viewpoint is, that rising housing prices are an inevitable trend of economic development. For Wen Jiabao to make suppression of house price the goal of macroeconomic regulation and control is a mistake of direction. The economic issue in the PRC is not that housing prices are too high, but that wages are too low.

Almost at the same time, Hu Shuli, editor of the financial journal Caijing, which is highly influential in elite social strata, published an editorial in the latest issue entitled “The Plan for a ‘New deal for Real Estate’ Must be Adjusted” [2], joining the chorus of criticism of the regime. Hu Shuli criticizes Wen Jiabao’s approach of ad hoc remedies, persisting with administrative methods that have already been proved to have failed. The result is “chopping off the water supply to find it flowing more than ever”” real estate prices are “rising thanks to adjustment”. Hu Shuli referred specially to how contradictory phenomena appeared under Wen Jiabao’s new deal for real estate: On the one hand the across-the-board rises in housing prices far exceed the bearing capacity of medium and low earners; on the other are powerful and influential central government agencies, whose organizations continue to build and allocate housing. Standards have risen thanks to reform, with welfare housing allocated to employees in the name of “economy housing”. Moreover, the funds for building and buying housing all actually come from the banks, high levels of risk are concentrated in the bank system, and the difficulty of government regulation has doubled.

It seemed to Hu Shuli that Wen Jiabao’s main mistake lay in not having “led the forces both of supply and demand into the market,” and thus being unable to draw support from the strength of the market to restore the unbalanced economy. Are things really as simple as Ms. Hu imagines? To observers, the reality in the PRC is that not only is government power politically far greater than popular power, but in the economy as well the government’s financial muscle also far outweighs the people’s. This is because the PRC economic reforms have undertaken neither democratization nor privatization. Not only have the resources controlled by the state not diminished, they have greatly increased. Given such a basic balance of power, the main result of thoroughly releasing market forces may have been to drive the common people down a dead end. Regretfully, one group of mainland elite represented by Hu Shuli is blind to this point, and carries on with superstitious veneration of market mechanisms.

Professor Song Guoqing of Beijing University recently published an article explaining that some of China’s mainstream economists advocating marketization have finally started to realize the serious consequences for the economy which the reality of officialdom “gaining weight” at the people’s expense [3]. The article shows beyond the shadow of a doubt that “The basic reason for the current drop in consumption rates is that in the system of national income distribution, the proportion of government financial and SOE revenues have constantly risen, while the proportion of personal income has constantly fallen. A policy of stimulating citizens’ consumption has been carried out for 8 years, in which time however the proportion of total GDP accounted for by individual consumption has fallen 8 percentage points and was moreover continuing to fall.”

The major value of Song’s article lay in spelling out the fact that the common people’s consumption could not rise was by no means because they had money they were unwilling to spend, but because they really had too little money. Song pointed out that, overall, the China’s savings ratio is indeed quite high, but citizens’ total deposits, together with residents’ individual deposits, only occupies 30-40%, while the state control government and the enterprise deposits have occupied the lion’s share.

Since 1978 the distribution of China’s national income between officialdom and the people has gone through a U curve. With fangquan rangli [relinquishing central power and yielding profit], there was an initial trend of officialdom losing weight and the people gaining, but in the subsequent macro adjustment, the trend was for officialdom to gain weight while the people lost it. A major reversal of this dates from the arrival on the stage of Zhu Rongji, and in particular from the tax reforms of 1994. This tendency has intensified, and has now achieved a new peak, most obviously displayed when China’s financial revenues pushed up from 2 to 4 trillion RMB in 4 years. The government side kept gaining and the people kept losing the more Wen Jiabao carried out macro adjustment. Did he realize that this was in no way a good sign? The trouble for Wen, and Hu Jintao as well, is that if the ratio of official to popular asset strength is not fundamentally changed, whether by administrative or market methods, officialdom can only continue to prosper at the expense of the people, and so increase the danger of officials driving the people to revolt. But do Hu and Wen have the wisdom and boldness needed to thoroughly reverse this ratio?

[1] 温家宝宏观调控的大麻烦:官越调越肥,民越调越瘦

[2] “
房地产新政方略需调整

[3] Song Guoqing, “Bias in domestic income distribution causes fall in consumption rate”

(
宋国青:国内收入分配的偏斜导致消费率下降 ) Ershiyi shiiji jingji daobao, 11 November 2006.

November 14, 2006 10:15 AM
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