How does the Chinese government stimulate consumption

The infrastructure as the key to growth

DW: How is the Chinese economy doing right now?

Yu Yongding: China's economy is facing major challenges. Economic growth has been slowing since 2010. We had hoped this would eventually slow down and the economy would grow faster again, but unfortunately that is not the case. At the moment, the question that arises is whether the Chinese economy will stabilize at the current level. We're not sure it will, but there are some steps the government can take to halt the downward trend.

It must be taken into account that China's economy is in a transition phase. In previous years, investments and exports were the growth drivers. But such an economic structure is not sustainable, so we have to change something. We have to support consumption and domestic demand. This is a big change and such upheavals are often accompanied by transitional phases in which economic growth slows down.

For example, we invest less in the real estate market. If growth is not to decline in the process, more consumption must be correspondingly increased in the private sector. Unfortunately, consumption is an endogenous variable. Politicians have only a limited influence on them, since most consumers make their decisions independently of politics. While investments, especially in the real estate market, fell dramatically last year, from 40 to 1 percent, consumption grew by 10 percent. This only partially compensates for the negative effect of the decline in investment. In addition, the world economy has collapsed.

Now there are different ways to deal with this situation. One is to do whatever it takes to stimulate consumption. However, the Chinese government may not have been able to do this to a sufficient extent.

So the Chinese government should intervene more strongly in economic activity?

No. I think the Chinese government should implement many reforms faster. If, for example, the pension system is reformed and the education system is designed in such a way that poor people benefit more from it, then more will be consumed - but that takes time.

In addition, too much has been invested in real estate in China, too many resources have been used in building houses, condominiums, five-star hotels or skyscrapers. At the same time, China is still a poor country. So there are many areas that China could invest in, such as infrastructure.

Why isn't that done?

Investments were made in such areas now and also during the global financial crisis. Since the government feared a huge decline in growth, it has overzealously put together infrastructure stimulus packages, many of which were not well thought out. So a lot of money was wasted. This has given infrastructure investments to stimulate the economy a bad stigma. Now the government must convince the people that the direction is fundamentally right, despite the mistakes that have been made. We need investments in infrastructure - and it will not only benefit the poor. The investments will also help stabilize the economy. I think we should convince the government to pursue an expansive fiscal policy.

How do government officials react to their proposals?

We have spoken with members of the government and I think such discussions will have some influence on the decision-making process. Politicians are currently pursuing fiscal policy to promote growth and trying to find a balance between the reform of many institutions and the structural adjustments that are currently taking place. In return, a budget deficit of 3 percent is accepted this year - after a deficit of 2.4 percent last year. The deficit could be even higher next year.

What growth rates do you expect for China in the next five years?

China may be able to maintain its six percent growth target, but China's officials and economists agree that the potential growth rate should be closer to six and a half percent.

If consumption is so critical, how can it be stimulated?

The living situation should be improved, and above all affordable housing should be created for many young people. To this end, the government is pushing ahead with appropriate projects and trying to build around 10 million residential units per year. This is very important.

The government is also trying to improve the health system. Every Chinese person is insured through health insurance in China, but it is not financially strong. With a better system, people would no longer have to put a lot of money aside to cover themselves for medical emergencies. In addition, the government is trying to improve the pension system.

But China is a huge country and the reforms are challenging. Since we do not expect consumption to miraculously increase overnight, investing in infrastructure remains the best way to boost the economy.

We need a better social welfare system and we need modern supply systems in the cities. For example, sanitation is often not good and we need to improve sanitary conditions in rural areas. Even running water is a problem. All of this will consume huge sums of money, but if we design such projects carefully and finance them through a higher public deficit, then that should be able to stabilize the economy.

Yu Yongding is considered one of the leading economists in China. He is a member of the Foreign Affairs Advisory Committee of the State Department and a member of the National People's Political Consultative Conference (NPPCC).

Interview conducted by Manuela Kasper-Claridge.