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China''s economy at risk of deflation as growing income gap foments tension
By Finfacts Team
Aug 1, 2005, 20:55

China''s State news agency Xinhua reports that local economists fear deflation as the economy powers ahead with a growing income gap fomenting tension.

At the second China economic observation forum at the weekend, some economists predict that China''s economy may experience a deflation similar to what has afflicted Japan for more than a decade, with prices falling across the economy rather than rising.

Lin Yifu, Director of China Center for Economic Research (CCER) of Beijing University, said at the forum held quarterly by CCER that owing to the overproduction in most manufacturing sectors since 1998 and the excess capacity from over-investment in some sectors in 2003 and 2004, China is expected to see deflation later this year.

Wang Jian, Deputy Secretary General for the Economic Research Institute under State Development and Reform Commission, said that declining growth of the Consumer Price Index (CPI), falling business earnings, as well as losses in downstream industries are all signals that China''s economy has taken a cooling trend.

According to Wang, China''s economy has reached the middle phase of the highly-growth cycle driven by heavy industry investment since 2003. So the investment is expected to fall in 2006 despite a continuing rapid growth, he said.

As for the consumer sector, because this year''s good harvest may result in fall in farm prices, Chinese farmers, accounting for China''s largest population sector, are expected to see their net income growth this year to be lower than in 2003, which will limit the expansion of the domestic demand, said Wang.

On the other hand, the lower expectation of this year''s economic growth in Japan, the European Union and the United States caused by soaring oil prices will also lead to a fall in China''s exports, he said.

As a result, with additional new capacity, it is inevitable to see over-supply and price decrease then, said Wang.

According to Yuan Gangming, research fellow of the Center for China in the World Economy, at Qinghua University, said China''s investment will fall with declining prices of consumer goods, industrial goods and also a fall in of raw materials.

China''s economy has been in the alert zone of deflation, said Yuan.

Professor Song Guoqing of CCER has the same worries. Through data analysis, Song demonstrated that the 9.5 percent growth of China''s GDP in the first half of this year was driven by the growth of a favourable trade balance to a large extent as the real growth of domestic demand was only 3.5 percent.

With cooling investment in real estate industry, and pessimism on a positive favourable trade balance growth caused by decreased demand of overseas market, acuter trade frictions and RMB (renminbi) appreciation, China''s economy tends to be cooler in a short term, said Song.

So there is possibility of weak demand and deflation in the same period of time, said Song. However, he forecasts that deflation will not last long.

Lin suggests that China should make more efforts in expanding domestic demand, especially the purchasing power of farmers by supporting infrastructure construction in rural areas and giving more opportunities for farmers to work in urban areas to increase their income.

Income gap grows

The widening income gap among Chinese farmers and urban residents is the root cause of disharmony, members of the Standing Committee of the 10the National Committee of the Chinese People''s Political Consult ative Conference (CPPCC) said last month.

The ratio of annual disposable income between Chinese farmers and urban residents was 1: 2.57 in 1985. The gap widened to 1: 3.23 in 2004.

The CPPCC standing committee members who are regarded as advisors in China''s political life, warned people to be aware of the fact that China has 90 million people whose annual per capita net income stands at or below RMB865 (about US$105). These people account for 10 percent of the total rural population.

An Qiyuan, who was attending the 10the meeting of the CPPCC Standing Committee, also called for much attention to be given to widening income disparity among various trades and areas.

A photo from Bo Xun, a Web site created by Chinese dissidents, shows the crowd gathered outside the police station in downtown Chizhou where rioters set three police vehicles on fire. Crowds also looted a nearby supermarket

The income of best-paying professions was 2.62 times of that for the lowest-paying professions in 2000. But the figure rose to 3.98 times in 2003 and 4.25 times in 2004 respectively.

Statistics of the first nine months showed, the income was RMB18,798 for people working in the computer and software sector, RMB15,982 for people in the fields of finance, and RMB15,498 for people in the science and technology sector.

However, the income of low-paid professions such as agriculture, animal husbandry and fishery, hotel and restaurant, wholesale and retail sectors ranged from RMB4,655 to RMB8,057.

The income was also diverse for different regions. The per capita income of China''s top five cities, namely Shanghai and Beijing municipalities and Zhejiang, Guangdong and Fujian provinces, averaged RMB 7,453 in the first half of this year, which doubled the per capita income of the five poorest provinces and autonomous regions.

Xinhua says that Chinese experts have repeatedly warned that the growing income gap will pose a threat to social stability and urged measures to be taken to solve the problem.

The government should expand the social security network to entire low-income population in urban areas, including the unemployed and migrant workers, Ding Ningning,a researcher of the State Council''s Development Research Center, said.

Planned income tax revision

Xinhua reported today that the draft amendment to the personal income tax law the State Council, which has in principle been approved, is a belated but important step towards updating one of the country''s obsolete laws.

The decision made by the State Council, China''s cabinet, on July 26th has essentially cleared the way for the draft to be given to the Standing Committee of the National People''s Congress, the top legislative body.

Before its submission, further revisions may still be made such as to the threshold for personal income tax, which may be raised, while a decision to do away with the present one-size-fits-all basis of RMB800 (US$99) has clearly been endorsed by the government.

That old tax threshold, determined according to the average income level, has not been raised since the personal income law was adopted in 1980. At that time, a monthly salary of RMB800 was beyond the imagination of most Chinese people who lived on a monthly income of merely tens of renminbi.

China quadrupled gross domestic product (GDP) within two decades by 2000. Last year the country''s per capita GDP exceeded RMB10,000 (US$1,230).

In the first half of this year, the per capita disposable income of urban residents reached RMB5,374 (US$663) while rural Chinese on average netted RMB1,586 (US$196) in cash, up 9.5 per cent and 12.5 per cent respectively over the same period last year.

Meanwhile, robust growth of the national economy has boosted tax revenues. Between 1994 and 2004, the country''s total tax revenues soared five fold to RMB2.57 trillion (US$317 billion).

Current income levels across the country have made the existing RMB800 threshold, originally designed to tax the rich, has become a heavy burden for too many people. For example, it is very difficult just to make ends meet in major cities like Beijing and Shanghai.

A tax cut will boost the public''s consumption power, a key growth engine that the country has yet to make full use of.

It is not clear whether the new threshold will finally be fixed at RMB1,200 (US$148) or RMB1,500 (US$185).

A Chinese City''s rage at the Rich And Powerful

A feature article in Monday''s Washington Post (August 1, 2005), reports on Liu Liang, a slightly built computer student, who was home in the city of Chizhou for summer holidays. At about 2:30 on the hot afternoon of June 26th, he was pedaling his bicycle by the downtown vegetable market on Cuibai Street.

Driving down the same street in his new-looking black Toyota sedan was Wu Junxing, deputy manager of a hospital in nearby Anqing. Wu, accompanied by a friend and two bodyguards, had come to Chizhou that day to attend opening ceremonies of a new private hospital and, associates said, survey the market to judge whether he should invest in his own facility.

Liu''s bicycle and Wu''s shiny four-door sedan collided, sending Liu crashing to the ground. Almost immediately, witnesses said, Liu, 22, and Wu, 34, began arguing over who was at fault. In the heat of the dispute, they said, Liu damaged one of Wu''s side-view mirrors, prompting Wu''s muscular bodyguards to burst from the car and beat the skinny young man senseless, leaving him bleeding from his mouth and ears.

The beating, ignited a spark of anger that became a riot and an expression of rage against the Chinese Communist Party''s new fascination with businessmen, profits and economic growth.

The writer reports that Chizhou''s self-described "common people" rose up against what they perceived as their local government''s willingness to side with rich outside investors against Chizhou''s own. By the end of the evening, 10,000 Chizhou residents had filled the streets, some of whom torched police cars, pelted overwhelmed anti-riot troops with stones and looted a nearby supermarket bare.

The Washington Post says that the violence in downtown Chizhou startled the leaders of this forward-looking city of 120,000, set in the rich alluvial farmland of Anhui province near the Yangtze River, about 250 miles southwest of Shanghai. Dismayed city officials deplored the impact on their campaign to attract investment and broaden Chizhou''s economic base. "Illicit elements" were to blame, they said.

However, the newspaper says that the riot, like a growing number of flare-ups in other Chinese cities, was in fact directed against the flourishing alliance of Communist Party officials and well-connected businessmen that runs Chizhou. Before calm returned to the streets, the disturbance had become a political rebellion against the increasingly intimate connection in modern China between big money and Communist government.

"When anger boils up in your heart so long, it has to burst," said a Chizhou man who was part of the crowd that night.

As the Communist Party strives to continue the swift economic growth that has become its new ideology, the official partnership with private business has generated resentment among those left behind: farmers whose fields become industrial parks, workers whose socialist-era factories go under, youths with assembly-line jobs at $ 60 a month.

In their eyes, the party that assumed power in China 56 years ago as a champion of peasants and workers seems to have switched sides, backing capitalist businessmen instead of the poor as part of a new get-rich ethic in which bribery plays a big role.

The Washington Post says that despite draconian laws against attempts to challenge the party''s rule, the government-funded Ta Kung Pao newspaper said Public Security Minister Zhou Yongkang estimated that 3.76 million Chinese were involved in 74,000 "mass incidents" during 2004.

Preventing the unrest from spreading has become a major preoccupation of President Hu Jintao and his lieutenants, who regularly call for stability as a condition for further economic progress. The stakes, they know, are high. If the violent outbursts get out of control, they could undermine China''s boom and, ultimately, the party''s grip on power.