China 'unlikely to displace US as global growth engine'

CHINA is unlikely to surpass the United States as the engine for the world economy soon as too little of its growth is going to its consumers, says a former chief economist of the Singapore Government.

'The pie may be larger, but the slice that goes to the households is smaller,' said Professor Tan Kong Yam at a talk on the Chinese economy yesterday.

Though China has been experiencing phenomenal growth rates, consumption as a share of gross domestic product (GDP) has fallen below 40 per cent, down from over 50 per cent in 2000.

This trend may seem worrying when juxtaposed against the US, where consumption as a share of GDP has risen above 70 per cent.

Prof Tan highlighted the reasons for the weak consumption in his talk.

'There is a rising burden on households despite high GDP growth because the state has shifted the financial burden of education, health care, retirement income and housing to the household sector,' he said.

China's education expenditure, for example, has remained stagnant at 3 per cent since 2001, while government health-care expenditure is only 0.6 per cent of GDP. This is a marked difference from 6 per cent in developed countries and 1.5 to 2.5 per cent in developing countries.

'Government expenditure is the part that helps households, but it's not going up as much,' said the economics professor at the Nanyang Technological University.

This is despite the government, together with the corporate sector, being the main beneficiary of China's growth, he said.

Increasing household taxes, coupled with strong margins from government-controlled companies, represent vast foreign reserves of 'more than US$1 trillion', or over S$1.5 trillion.

Corporate profits power the export- and investment-driven economy, resulting in the average household not gaining as much.

'Household savings have actually come down,' he said.

Even within Chinese households, income inequalities have become more pronounced with wages rising much faster at the top end.

'The rising tide lifted all boats, but the tide lifted the luxury boats much more than the sampans,' he said.

The effect of weak consumption, however, may not have a great impact on investors.

'The 250 million to 300 million people living in the coastal regions are sufficiently large and relevant as a market,' said Prof Tan.

However, he regards political instability as a possibility, with the 'sense of greater disenchantment felt in the country'.