History will be the ultimate judge, but there is good reason to believe that China’s recently completed Third Plenum will come to be regarded as a pivotal moment in the country’s development. At long last, China’s senior leadership has endorsed a raft of reforms that could impel the economy’s shift from reliance on exports to consumption-led growth.
Until now, this transformation was framed in terms of broad goals and aspirations. For example, the 12th Five-Year Plan, adopted in March 2011, promised the emergence of a consumer-led economy, resting on the building blocks of urbanisation and the development of an embryonic services sector. Notwithstanding the importance of these commitments in setting out opportunities for China’s middle class, they lacked a critical component: incentives for Chinese families to convert their newfound income into discretionary consumption.
On the contrary, financial and economic insecurity has gripped Chinese households since the “iron rice bowl”—the cradle-to-grave support that the socialist state offered workers and their families—was discarded in the late 1990s. Fearing for the future, households have hoarded incremental income, rather than spending it on consumer goods. Economists call that precautionary saving. China’s leaders called it frustrating.
The reforms endorsed by the Third Plenum focus on this wedge between income and consumption, offering specific proposals aimed at altering the behaviour of fear-driven Chinese families. Especially important is the proposal to channel 30% of the profits of state-owned enterprises (SOEs)—currently running at close to $400 billion—into the country’s woefully under-funded social safety net. China’s national health-insurance plan, for example, boasts nearly universal coverage, but the benefits it provides are negligible.
The same is true of China’s retirement system: the workforce’s enrolment rate is around 50%, but only $600 of assets per worker (in national, local government, and private pension schemes, combined) are available to cover lifetime retirement benefits. Little wonder that Chinese families, fearful of such an uncertain future, save to excess. An adequately funded safety net could go a long way in tempering the expectations underlying this behaviour.
Several other measures proposed at the Third Plenum seek to shift Chinese families’ behavioural norms. A major reconsideration of the one-child policy is