For the second time in three months, the Central Bank of China has reduced interest rates to 5.35%. As Burke Ugarte highlighted, these policy has been successful in inducing manufacturing growth, but fails to encourage consumer spending. The growth in investment in factories, infrastructure and other fixed assets is still running higher than 25% than growth in consumption.
A new Chinese policy plans was designed in order to address the problem of insufficient consumer spending. Such policy is revolves around lower growth target rates and is focused on closing the gap between manufacturing and consumption growths. Such gap has led to the impoverishment of consumers. According to the Wall Street Journal, the problem is that “wealth is being transferred from households to the government, instead of the other way around.”
While measures such as the reduction of interest rates are taken in order to boost China’s economy, the country remains on a critical situation, and its already weak political system is in the spotlight. An example of China’s weak political systems, the Hukou, is analyzed by Tom Miller in China’s Urban Billion. Miller stresses that millions of Chinese citizens (and consumers) are victim of the institutional discrimination inherently tied to the Hukou, and their pockets are tight. Their lack of access to public education and healthcare constraints their capability to contribute to the economy.
Having this into consideration, the government promised to increase its spending on “pensions, health insurance, unemployment benefits and other social transfers, encouraging citizens to consume more and feel more secure.” By improving the prospects for the future, the government can trigger consumer spending and furthermore, prevent the increasing amount of business acquiring debts to go under in the close future.