CHINA: Rural Spending, Safety Valve for Hot Economy

By IPS Correspondents Reprint | | Print |

Antoaneta Bezlova

BEIJING, Mar 13 2006 (IPS) - Against the backdrop of rising trade tensions between China and the outside world, Beijing’s new drive to boost rural spending and close the wealth gap between the booming cities and its neglected countryside is being promoted as a safety valve for trade tensions with developed and developing countries.

By expanding China’s consumer spending boom from the cities to the vast rural areas, Beijing hopes to generate need for imports and address the country’s trade imbalances.

The plan for a “new socialist countryside” unveiled at the meeting of China’s parliament last week aims to shift development resources from the cities to the countryside by pouring in billions of dollars in social spending and farm aid.

Chinese leaders have promised new schools, hospitals, road and other aid, hoping that by increasing the disposable income of the rural population they can spur more consumption of imported goods and services and reduce trade discords.

“Frictions between China and its trade partners are now no longer limited to the trade sphere,” comments Mei Xinyu, expert on international trade practices with the Ministry of Commerce. “They are now affecting the whole economic structure. For instance, since 2002 they have been the main reason behind the outside pressure on China to appreciate its currency.”

If trade volumes are taken into account, developed countries remain the main force in China’s trade disputes with the outside world. But if numbers of filed anti-dumping investigations are considered, says Mei Xinyu, then developing countries are increasingly becoming the main factor in China’s trade disputes.

China remains the most frequent subject of new anti-dumping investigations, with 22 initiations directed at its exports during January-June 2005, according to a report by the World Trade Organisation.

Central bank governor Zhou Xiaochuan said last week a prime target of the new government policies would be to lift consumer spending and imports to narrow the trade gap.

China’s trade surplus in 2005 was more that 102 billion US dollars, according to data released by the customs department in Beijing – more than three times the 2004 figure.

This dramatic surge has strained relations with the United States and European Union, the nation’s largest export markets. Both have imposed quotas on imports of Chinese textiles and the EU last month said it would slap tariffs on leather shoes from the mainland.

Under pressure to limit China’s exports, the Bush administration has started talking tougher on confronting China over its trade practices. Some U.S. lawmakers are urging the government to label China a currency manipulator in a report due next month, saying the nation is keeping the yuan undervalued to give its exporters an unfair advantage.

Senators Charles Schumer, a Democrat, and Lindsay Graham, a Republican, are sponsoring legislation that would impose tariffs of 27.5 percent on Chinese-made goods unless the yuan is allowed to rise faster.

Chinese exports have continued soaring despite Beijing’s decision last year to make the yuan about two percent stronger against the dollar and to allow it to float in a restricted margin against a basket of currencies instead of being pegged directly to the U.S. dollar.

Chinese government officials have said they are not pursuing a trade surplus with the U.S. and are seeking to address the gap. The government will “correct the imbalance between imports and exports” by raising incomes to spur demand for foreign goods and encouraging purchases of technology, Premier Wen Jiabao said on in his national address on Mar.5.

”We are willing to continue to adopt active measures to gradually solve the trade imbalance” with the U.S., Foreign Minister Li Zhaoxing told reporters in Beijing on Mar.7.

But experts caution that redirecting state intervention from the urban economy towards the countryside where the vast majority of Chinese people live would not be sufficient to change the export-driven growth model of the economy.

Overseas sales of manufactured goods have become an important engine of growth for China’s overall economy. They represent some 92 percent of China’s non-agricultural exports and Beijing has aggressively sought new overseas markets for their expansion.

Manufacturers remain attracted to China for factors other than cheap labour and cheap currency such as the vast industrial base that makes sourcing many supplies inside the country easier than in neighbouring countries and especially the absence or the lax enforcement of labour laws.

Export processing factories in China’s coastal areas now employ some 36 million young peasant women but rural China has a surplus of labour estimated to be as large as 200 million. So far factories have been only required to submit to voluntary codes of conduct set by foreign companies. Free trade unions or the right to strike remain only distant prospects.

China’s position as the ‘workshop of the world’ means that it is absorbing imports from a variety of other countries in the form of components, which are then transformed into the finished product within its borders – and then exported worldwide.

So while China has something in the range of a 200 billion-dollar trade surplus with the U.S., it also has a 137 billion-dollar trade deficit with the rest of Asia. As other countries have shifted production to China, so the trade deficits of the U.S. with these countries have fallen.

“Given the structure of Chinese manufacturing exports, changing the export strategy in a short-term would be very difficult and more trade frictions are inevitable,” predicts Prof. Wang Shouyang at the Centre for Scientific Forecast under the Chinese Academy of Sciences.