China last week unveiled plans to slow its rapid growth rate, but concerns remain over how Beijing will achieve this goal.
Adding to the uncertainty is the vast amount of spending that is decided at local level. About 22.2% of 2011’s budget has been earmarked for general transfer payments to local governments.
It is unclear if these funds will be allocated to social security, education and healthcare or to other areas such as public security and defence.
Bulkai argues that Beijing will have to follow through on its stated intention of bolstering social insurance if it is to stimulate domestic demand successfully and thereby rebalance the economy.
China’s relatively low social insurance provision means many people save for precautionary reasons and keep their consumption relatively low.
Spending more on education and healthcare is essential if China is to increase domestic consumption, Bulkai adds.
James Chong, the manager of the Martin Currie China fund, says China’s efforts to rebalance its economy may create good opportunities for investors.
Boosting domestic demand could make Chinese retailers and goods manufacturers an attractive proposition, he suggests.
Meanwhile, increased spending on housing may draw investors’ attention to building supplies companies, while food growers and producers may benefit from higher levels of spending at home.
However, Chan is less certain that the new drive to rebalance the economy will be immediately successful, noting that previous five-year plans have failed in this area. He says the most important step in lifting domestic demand will be to increase household incomes, which have trailed behind corporate incomes and GDP growth for some time.
“Undoing this will require many years of reform and could include policies such as higher minimum wages, increased dividend payments by state companies, higher interest rates to reward household savers and increased social spending,” Chan explains.
Even if Beijing is successful in its plans for reform, Chan remains doubtful that it will achieve the core aim of slowing growth and cooling China’s overheating economy.
Moody’s retains its forecast of 9.3% economic growth for 2011 and predicts that the economy will expand at 8.5-9% annually for the next few years, Chan says. Inflation may start to slow by the close of 2011, Chan says, but will still overshoot its 4% goal.
Despite the bold proclamations in its five-year plan, China’s economy could still be tipped too far on the side of growth to rebalance fully in the coming years.