China Must Shift Spending Toward Encouraging Consumption, Lawmaker He Says

China can achieve a shift to a consumption-driven economy within five to 10 years by scaling back its reliance on capital spending, a senior lawmaker said, urging changes to policies that have fueled decades of growth.

Expansionary fiscal policy geared toward construction has helped push down consumption’s share of the economy to 47 percent, He Keng, a deputy director of the Financial and Economic Affairs Committee of the National People’s Congress, said in an interview yesterday. That compares with a global average of 65 percent, he said.

“China may need five to 10 years to bring consumption back to the level in 1978, and that may happen only when policies are properly shifted,” said He, a former deputy director of the National Bureau of Statistics. Stimulating investment by running a large budget deficit “will further derail the economic structure.”

Consumption accounted for about 62 percent of China’s economy in 1978, when the country began opening up its markets, according to the statistics bureau.

Investment pouring into building roads, railways and real estate helped keep China’s average annual growth above 10 percent over the last decade. At the same time, the spending has turned the country into the world’s biggest emitter of greenhouse gases. He said it’s also crowded out resources for boosting consumption.

He’s committee is one of nine under the National People’s Congress. It reviews laws and regulations on financial and economic issues, provides advice and suggestions to the government and supervises the implementation of laws.

Lower Budget Deficit

Premier Wen Jiabao’s government plans to run a budget deficit of 800 billion yuan ($127 billion) in 2012, about 1.5 percent of gross domestic product, according to his annual work report issued March 5. The gap, which would be the smallest in four years, is narrower than last year’s deficit of 850 billion yuan, even as the government pledged to keep an “active” fiscal policy.

Wen pared the nation’s economic growth target to 7.5 percent from an 8 percent goal in place since 2005, signaling leaders are prepared to cut reliance on exports and capital spending. A weaker global economic recovery has added to the urgency of boosting domestic demand.

China’s economy can grow 8.5 percent this year if risks from local government debt and the property market are well controlled, He said. Exports may grow 8 percent to 8.5 percent this year, he said, compared with last year’s increase of 20.3 percent.

Economic Plans

The country can expand at an 8.5 percent to 9 percent pace “for a long, long time” if it boosts productivity and innovation while increasing incomes and consumption, He said.

About 3,000 lawmakers are gathered in Beijing this week and next week to discuss the year’s economic and political plans. Chongqing Mayor Huang Qifan proposed at a panel discussion on March 5 that the government raise the deficit target to 1 trillion yuan to maintain “fast” economic growth.

Huang wasn’t alone among National People’s Congress delegates in calling for looser fiscal policy, He said. “Many provincial and city leaders haven’t altered their thinking,” he said. “They keep on lobbying to add investments and start new projects and chase high GDP growth.”

The government also needs to expand property taxes nationwide from trials in Shanghai and Chongqing to curb speculation and give ordinary citizens more opportunity to buy homes, He said.

“I hope a general proposal about how to implement a property tax can be rolled out as soon as possible,” He said. His NPC committee has yet to see such a plan, He said.

Finance Minister Xie Xuren said on March 6 that the nation may expand property-tax trials to guide housing demand as the government prolongs efforts to cool the real-estate market. Xie didn’t elaborate.

--Victoria Ruan. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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