CHINA/DOMESTIC DEMAND: DON'T BET ON RURAL

UNCLAS SECTION 01 OF 03 BEIJING 000693

SENSITIVE
SIPDIS

STATE PASS USDA/ERS
STATE PASS USDA/FAS/OSTA CHINA DESK
STATE PASS USTR FOR STRATFORD
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EAGR CH
SUBJECT: CHINA/DOMESTIC DEMAND: DON'T BET ON RURAL
CONSUMERS YET

Refs: A. Beijing 580, Beijing 589, Beijing 649

B. Beijing 583

C. Beijing 590

D. Beijing 614

E. 08 Beijing 4100

F. Shanghai 119

(U) This cable is Sensitive but Unclassified.
Please protect accordingly.


1. (SBU) Summary: Slumping rural income growth due
to both lower agricultural prices and remittances,
and a still-inadequate rural social safety net
hamper Chinese Government efforts to boost rural
consumption. Consumer spending coupons and rebates
have had only a limited impact. Despite an emphasis
on "livelihood" issues and domestic-demand-led
growth at the March 5-13 National People's Congress
(NPC),efforts to maintain economic growth will
likely continue to rely mainly on state-led
investment. End Summary.

Government Focuses on Boosting Consumption
--------------


2. (SBU) This year's NPC focused on achieving 8
percent growth in 2009 as well as rebalancing
China's economy by relying less on investment and
exports and more on domestic consumption,
particularly private consumption (Ref A).
Reflecting long-standing concerns about China's
growth model, Premier Wen Jiabao's Government Work
Report stated that China "needs to vigorously expand
domestic demand, particularly consumer demand."
Ministry of Agriculture (MoA) public documents
stated that "rural areas have the greatest potential
for expanding domestic demand" and that "the focus
for ensuring improved livelihoods ... is on
farmers."

Government is Acting
--------------


3. (SBU) To address the need to boost consumption in
the near term, Wen's Work Report said the Government
will "promptly work out and introduce policies and
measures to encourage consumption and vigorously
develop consumer credit" and make home appliances,
agricultural machinery, and automobiles and
motorbikes affordable to rural residents. The
Government has implemented "Appliances to the
Countryside" programs (see Ref B) and according to
Ministry of Commerce (MOFCOM) Beijing will provide
20 billion yuan (almost USD 3 billion) in subsidies
in 2009 to boost appliance sales in rural areas. On
March 12, an official said that MoA will expand
existing subsidy programs to boost farm equipment
purchases, which he argued are important not only to
boosting agriculture productivity, but also because
farm machinery sales and repair provide off-farm
employment. Local governments are also providing
consumer spending coupons to targeted rural and low-
income residents (see Ref C),although it is
doubtful the Central Government will make this a
nationwide policy.

But Lagging Rural Incomes Pose Challenge
--------------


4. (SBU) Vice Minister of Agriculture Wei Chao'an
said in a March 12 press conference on the margins
of the NPC that although farmers are key to boosting
domestic demand, "farmers' situation also makes this
difficult." Wei admitted that it would be difficult
to maintain the growth of real per capita rural
incomes in 2009 at the same six to eight percent
levels achieved over the previous five years. (Note:
real per capita rural income growth was eight
percent in 2008. End Note.) According to Wei the
difficulties are the result of the global financial

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crisis, which is causing lower agricultural
commodity prices, weaker agricultural exports, a
tough business environment for non-farm rural
enterprises, and job losses among migrant workers.
(Comment: According to official data around half of
rural incomes are derived from off-farm work. It is
unlikely that new jobs in government-backed
infrastructure projects will fully offset
unemployment resulting from slowdowns in the labor-
intensive exporting and property sectors. The
People's Bank of China's Quarterly Monetary Policy
Report stated that rural spending is more sensitive
to both positive and negative changes in income.
End Comment.)

And Changing Spending Behavior Takes Time
--------------


5. (SBU) Consumer retail spending numbers in China
have held up relatively well; retail sales increased
15 percent in January and February over the same
period last year. This increase, however, is much
lower than in recent years and was pumped up by
government purchases. Also, the rate of retail
sales growth is slowing when viewed on a month-to-
month basis. The real impact of the downturn on
consumption growth could be seen most clearly in the
appliance sales figures, which increased less than 3
percent despite the plethora of programs designed to
spur spending in this sector. World Bank China
Country Director David Dollar and other economists
point out that a near term private consumption boost
to the economy is unlikely. According to a March 13
blog article by Dollar, "consumption habits are not
going to change overnight." (See also Ref D)


6. (SBU) Xiao Geng, a macroeconomist and Director of
the Brookings-Tsinghua Center for Public Policy in
Beijing, claims consumption is unlikely to account
for a larger share of economic growth given current
circumstances. In a February 18 meeting with
Econoffs Geng noted that individuals still need to
save money for healthcare and their children's
education, and individuals earn little from their
financial assets because of the still undeveloped
financial system, which both leads to high
precautionary savings as households are forced to
self-insure and contributes to a growth of household
income which has lagged behind broader economic
growth. Xiao said the financial system as well as
the pension, education, and healthcare systems will
only improve gradually. Land experts such as Li
Ping from the Rural Development Institute also point
out that slow progress toward privatizing rural land
also hampers rural consumption (Ref E). The PBOC
noted in its Quarterly Monetary Policy Report that,
because of the weak social safety net and other
factors, since 2002 consumption spending of both
urban and rural households has become less
responsive to changes in income. (See also Ref F)


7. (SBU) Xiao also commented that consumer spending
coupons and rebates may not work well because
consumers will offset spending using coupons or
other incentive programs with other spending, thus
maintaining the same overall level of spending and
savings. Other contacts point out that many
consumers will find ways to turn consumer spending
coupons into cash through black market schemes and
then save the cash.

Comment: Rural Consumption Won't Save China
--------------


8. (SBU) Beijing is clearly committed to increasing
rural incomes and consumption, but this is a long-
term project that will take years to bear fruit.
With their high sensitivity to income effects, rural
residents are likely to reduce spending during an
economic downturn, especially one likely to impact

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migrant labor employment prospects. China's efforts
to boost rural consumption through ad hoc subsidies
and incentives may have some impact on the margins,
but cannot overcome the larger effect of rising
uncertainty and declining incomes. Over the next
few years, China will have to look elsewhere for
economic engines to pull domestic growth.


PICCUTA