Migrant spending key to growth

Liu Tao knows he will never be rich enough to own one of the luxury apartments in Beijing he has been paid to decorate for more than a decade, but he’s saving hard so that in another 10 years he’ll have enough for a home with indoor plumbing.

Like many of the 158 million rural migrant workers whose annual pilgrimages to city factories have fuelled China’s economic ascent, Liu has seen his pay and living standards rise steadily, but he still isn’t the free-spending consumer the country’s leaders urgently want him to be.

“I need to save up to take care of the kids and I’ve got the old people to look after,” the 37-year-old father of three said. He was standing in the unheated, sparsely furnished main room of his house in Zhoulou village, about an hour’s drive from Shangqiu in Henan province, southwest of Beijing.

Liu’s main spending constraint is not earning power – his monthly 3 000 to 4 000 yuan (R4 882), well above the average migrant pay of 2049 yuan charted by statistics – but a permit system (hukou) that denies millions of officially rural residents access to social services in cities where they work.

“If you go to the big cities you’ll see the tower blocks and tall buildings migrant labourers have built, but we don’t see any of the benefits. The government must ensure that wealth is shared with migrant workers.”

It’s a vital message for a Chinese leadership anxious to turn a nation of savers into spenders and rebalance the world’s second-biggest economy towards its huge domestic market. That would cut dependence on external demand twice in three years jolted by financial crises, with current trends pointing to the slowest year of economic expansion in a decade.

Stability and steady growth are core to the Communist Party’s justification for more than 60 years of one-party rule, making it acutely sensitive to anything that could dislodge it. But the leadership has yet to show its will to grasp the reform some of its economic advisers say is crucial.

The 600 million people China has lifted out of rural poverty in 30 years of development remain far from urban affluence. Inequality soars beside skyscrapers and dollar billionaires. IMF data shows consumption as a share of disposable income has plunged 20 percentage points in the past decade.

With city dwellers topping 50 percent of the population for the first time last year, it signals Beijing cannot unlock the potential of urbanisation unless it reforms the hukou system to turn migration into permanent city settlement.

Hukou allocates access to schools, hospitals and other services, keeping it out of migrant workers’ reach. This sweet spot still eludes Beijing, despite having turned its top companies into global leaders in terms of market share and profits, and amassing the largest store of foreign wealth on the planet at $3.18 trillion (R24.46 trillion) – much of it in the past 10 years.

Migrants have barely had a sniff of the riches, although they produce most of the economy’s value-added growth in the 200 million jobs they fill in the externally focused factory sector.

Wages have risen – in double digits for years and by 21.2 percent in 2011, government statistics show. But so have savings, showing rates of between 30 and 70 percent. China officially has 80 trillion yuan on deposit at banks. Analysts estimate roughly the same amount exists under mattresses, confounding economic orthodoxy that says higher wages in the hands of the poor translate smoothly into spending.

Many migrant workers save for housing, education and medical bills in the hope of a brighter future.

Signs of those hopes are on display in the brown wheat and corn fields speckled with grave mounts. The most recent ones are festooned with coloured paper models of new homes, cars and household goods – symbols of the prosperity older farmers can only dream of for their and their children’s afterlives.

OECD Development Centre research concluded urbanisation China-style conferred only half the benefits it should – improving income, but constraining consumption. Factors like inflation also eroded willingness to spend.

While most will readily agree living standards are higher than a decade ago, workers are far from well-off and feel the pinch of price rises acutely.

The annual rate of inflation hit a three-year high of 6.5 percent last July, exceeded the government’s 4 percent target in every month of last year and was still above that in January.

But that still understates the pain felt by rural residents who spend about 40 percent of household income on food, the average price of which rose by 11.8 percent in 2011.

Employment contracts providing accommodation and food also inhibit spending. Living in dormitories offers few incentives to acquire goods or spend beyond occasional trips to nearby towns.

Residency rights, or at least access in cities to medical benefits, would be a big help in unlocking migrant savings. It would magnify the impact of urbanisation unfolding across interior provinces. HSBC analysts believed by 2020 this process would turn China’s 31 provinces from the equivalent of poor Third World countries into places generating wealth, like a union between second-tier-developed and top-tier-developing countries.

“For sustained growth, the most important source is continuous technological innovation and structural transformation,” said World Bank chief economist Justin Lin. He believed China could follow up an unprecedented 30 years of 9 percent-plus average growth with another 20 years at 8 percent.

Failure to pursue further fundamental economic restructuring could see it unravel. Get it right, and China could grow and create jobs almost regardless of the external environment.

Foreign-funded firms employ about 40 million directly, while economists reckoned China created about 10 500 jobs for every $100 million of goods it exported.

Total exports of $1.9 trillion in 2011 imply 200 million workers owe their livelihoods to foreign demand, about a quarter of all the people employed in China.

Without reform, that dependence will remain unbroken and the rate of development will merely absorb the influx from the countryside. In 2011, about 21 million people became urban wage earners.

But that dynamic is the wildcard some investors believed would keep growth ticking. It is already creating shortages of workers and raising wages outside major manufacturing towns.

As China accelerates development inland, closer to the homes of many migrants, it may be possible for them to find jobs in districts where they are officially registered.

In Shangqiu – capital of China’s Shang Dynasty in the second millennium BC – recruitment agency worker Chen Xiaowei has seen no sign of a slowdown in demand for experienced staff.

“There’s going to be a shortage of workers here again this year. People still prefer to work elsewhere for better pay, but the government is still attracting businesses here too. So the shortfall of workers is going to grow and that means the pay gap will have to close. “Things have already changed in recent years. We’re catching up with the more prosperous parts of Henan, but we’re not there yet.” – Reuters