Quality Products International

China hopes social safety net will push its citizens to consume more, save less

by on Oct.01, 2010, under China, General News

I just came across this headline from one of the sections of the Washington Post. It got me thinking about a few other things that have been in the news lately about China trying to reduce the price of Real Estate and stop a bubble forming. The article with the above headline basically puts forward that the Chinese government is trying to encourage its citizens to spend. One of the ways it is doing this is to provide pensions, Health insurance and other welfare payments so that the poor or average citizen does not feel that they need to save every penny for future needs or in case of an emergency.

The key reason Chinese save so much and consume so little, experts say, is because without dependable government payments, they need to sock away money for the future — for medical emergencies, for children’s educational expenses, as a guarantee against a job loss or to help elderly parents.

“When a person has no medical insurance, unemployment insurance or endowment insurance, how can that person dare spend all their money?” said Tang Jun, a sociology researcher with the China Academy of Social Sciences. “The Chinese people are a nationality that likes saving money. . . . Ordinary people will only feel relieved about consuming if they don’t have to worry about not having money when they get old and not having money to go to the hospital.”

By Keith B. Richburg, Washington Post Staff Writer, Wednesday, July 14, 2010
Full article can be found here: http://www.washingtonpost.com/wp-dyn/content/article/2010/07/13/AR2010071305773.html?nav=emailpage

The underlying reason for the pensions etc. is not altruism on the part of the Chinese government. It is part of the economic planning process. Officials realize that Europe and the U.S.A. are not going to be able to consume the large output of Chinese manufacturers. In fact the anemic if not actual reversal in Consumer activity in these markets means that China has to look elsewhere for areas to market it’s good if it wants to maintain the current growth rate in its economy. The biggest untapped market at the moment for China’s goods is its own people. However historically the Chinese have been almost pathological savers and rarely will splurge on consumer items. This is changing in the cities and with some of the young but with a large percentage of its population still living in rural areas, away from the centers of new economic activity the consumer lifestyle has not reached the levels needed to sustain the economy. By providing social safety nets the Chinese government hopes to reduce the fears of its people with regards to future hardships and thus encourage them to spend on things now. The age of consumerism will go hand in hand with the social programs designed to alleviate worry and provide for those unable to provide for themselves.

Many in the U.S.A. should perhaps take note of this trend. At this time of economic hardship and recession there has been talk of reducing the social programs designed to help people at the low end of society’s spectrum and those who cannot find jobs. I have seen some journalists opine that the sense of entitlement that these social programs encourage is the cause of many of the problems we see in society today. Maybe they have a point and we have indeed gone too far in that direction. However one must take into account what would happen if those programs went away. People would have to plan for future needs, save their money, become fiscally responsible. No bad thing you might say. Well unfortunately as can be seen in China’s predicament this means that the rampant consumerism that drives the economy now would become a thing of the past. People would become more judicial in how they spent their money and thus the economy would in fact shrink to a new norm and growth would no longer be as fast as it was before. The U.S. economy which is based on consumerism would need to adapt and quickly. Many might see this as the way of the future. If so I wonder if it will be a thought out planned transition or a complete hands off approach. My guess is that it will be a comedy of errors and short term attempts to keep things as they are that will eventually give rise to a new economic paradigm.

Author: M. Charlin

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