China taking steps to boost domestic consumption

China has a new scheme that will:

1. raise wages, focusing especially on rural workers, whose incomes are about 30 percent of what city dwellers earn. The aim is to not only boost consumption but alleviate that growing and problematic wage gap.

2. China will deemphasize the manufacturing sector in favor of the more labor-intensive services sector, which will allow slow growth, thus reducing inflationary pressures while maintaining all-important job creation

3. They will push spending by providing a social safety net. Stephen Roach, an economist and nonexecutive chairman of Morgan Stanley Asia, figures that China’s current public pension system provides a mere $470 of retirement funds for the average Chinese worker – clearly not enough to encourage families to spend their income.

Roach predicts these three policies will be enough to raise private consumption in China to 42 percent – 45 percent of GDP by 2015, up from 36 percent today; that compares with 70 percent of GDP in the U.S. This could be excellent news for the U.S. and for Europe, which make and produce many of the consumer goods that Chinese citizens want.

Roach indicates, with the Chinese directing more of their funds toward public housing and pensions and exports dropping as a portion of GDP, the enormous savings surplus that has funded the U.S. deficit will begin to decline. That will cause interest rates on U.S. debt to climb – which could prove disastrous.

China’s target for gross domestic product for 2011-2015 is set at 7 percent, lower than 7.5 percent in the 11th Five-Year Program which ended last year. China’s annual economic growth rate during the 11th Five-Year Program was 11.2 percent, 3.7 percentage points faster than the goal of 7.5 percent.

Earlier reports said the threshold for individuals to pay income tax may go up to 5,000 yuan (760 U.S. Dollars) from the current 2,000 yuan so people will have more disposable income for consumption.

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