China’s Rural Incomes Surge in Boost for Consumption

A Corn Farmer in Rural Hubei Province
A farmer spreads out corn to dry in Hubei province, China. Photographer: Nelson Ching/Bloomberg

China’s 10.3 percent economic growth last year drove the biggest increase in the nation’s rural incomes in a quarter century, bolstering efforts to spur consumption in the world’s most populous nation.

In the countryside, per capita net income rose 10.9 percent to 5,919 yuan ($898), a statistics bureau report showed yesterday. The gain was faster than for urban incomes for the first time since 1997. The report also showed an acceleration in retail sales and industrial production at the end of last year.

A stimulus-induced investment boom has fueled growth in inland provinces, lifting wages both there and in trade-reliant coastal regions now fighting to retain workers: Guangdong, the biggest exporter among China’s provinces, said this week it will raise minimum wages. The potential gains for Chinese spending are a draw to President Barack Obama, who this week pressed President Hu Jintao for greater access for American companies.

“Faster rural income growth is a result of China’s economic rebound and booming construction across the nation, which boosted migrant workers’ employment and wages,” said Wang Tao, a Beijing-based economist at UBS AG, who previously worked at the International Monetary Fund. “There is a vast rural market to tap and the key is to boost jobs and incomes for farmers.”

‘Soft Landing’

Stocks rebounded today on speculation that declines triggered by predictions that interest rates will increase have been overdone. The Shanghai Composite Index rose 1.9 percent as of 11:30 a.m. local time after sliding 2.9 percent yesterday.

“The outlook for Chinese stocks is still pretty positive, said economist Fahd Rachidy, head of Asia ex-Japan in Hong Kong at brokerage Vantage Capital Markets HK Ltd. “Earnings will be supported by growth in the economy. While inflation will be a risk, the government will tighten just enough in the first half to ensure a soft landing.”

Footwear company Le Saunda Holdings Ltd. and Parkson Retail Group Ltd., both listed in Hong Kong, are among companies that may benefit this year as income growth boosts spending on “mass market” products, BOCOM International Holdings Co. said in an e-mailed note today.

During the financial crisis, China rolled out subsidies for purchases of home appliance and vehicles in rural areas, aiding manufacturers including Qingdao Haier Co., GD Midea Holdings Co. and Gree Electric Appliances Inc. In 2010, 173 billion yuan of home appliances were sold under the stimulus program, according to Ministry of Commerce data.

Commodity Prices

Agricultural price increases contributed to the gain in farmers’ incomes last year. In the second half of 2010, the average wholesale prices of corn, wheat and cotton in China rose an annual 15 percent, 6 percent and 64 percent, respectively, according to data from Shanghai JC Intelligence Co.

Chinese officials have indicated that the nation’s next five-year plan, running through 2015, will have a renewed focus on boosting consumption to reduce dependence on investment and exports. Policy makers have for decades sought to narrow the gap between inland provinces and coastal export powerhouses.

Yesterday’s report also showed the difference that remains: the average urban disposable income rose 7.8 percent to 19,109 yuan, still more than three times the rural figure.

Japanese Economy Minister Kaoru Yosano said yesterday’s figures showed it was “probably the case” that China had overtaken Japan as the world’s second-biggest economy, a ranking likely to be confirmed when Japan reports gross domestic product on Feb. 14.

Auto Market

China’s vehicle sales rose 32 percent to 18.1 million in 2010, keeping the auto market ahead of the U.S. for the second year running. Sales are expected to grow about 15 percent this year, with about two-thirds of the buyers coming from cities in which the average annual income is less than $5,000, according to J.D. Power & Associates.

Obama said Jan. 19 that the U.S. can more than double exports to China, which were about $100 billion last year. Hu, who traveled yesterday to Chicago to talk with business executives, said that China is focusing on domestic demand and consumer spending as its economy evolves.

“We want to sell you all kinds of stuff,” Obama said to Hu during a joint news conference. “We want to sell you planes, we want to sell you cars, we want to sell you software.”

Export gains could help the U.S. to reduce a jobless rate that reached a 26-year peak of 10.1 percent in October 2009, and is now at 9.4 percent.

Retail Sales

China’s retail sales grew at a 19.1 percent annual pace in December, partly boosted by inflation, yesterday’s report showed. For the full year, the increase was 18.4 percent.

The economy’s strength will drive further increases in household income this year, supporting “solid growth” in consumer demand, JPMorgan Chase & Co. said in a note.

In the southeastern province of Guangdong, minimum wages will rise from Mar. 1, according to a statement on the provincial government’s website. The level in the city of Guangzhou will climb to 1,300 yuan a month.

In the countryside, income gains are “largely due to government policies favoring farmers and agricultural production, increased health-care coverage and the removal of taxes and fees on farmers in the past few years,” said Ken Peng, a Beijing-based economist at Citigroup Inc. He also cited food-price increases and said that the pace of future gains may depend “on how much the government will maintain policies in favor of rural households.”

Raising Rates

China’s economic growth accelerated to 9.8 percent in the fourth quarter, yesterday’s report showed. The expansion exceeded the 9.4 percent median estimate in a Bloomberg News survey of 22 economists and compared with a 9.6 percent annual gain in the previous three months.

Consumer-price inflation eased to 4.6 percent in December, a slowdown that economists, including at Deutsche Bank AG, said may be temporary. Deutsche Bank forecasts that inflation will peak at 6 percent in June.

The central bank may raise interest rates next month for the third time since the financial crisis, according to UBS. Nomura Holdings Inc. sees 100 basis points of increases this year, starting this quarter, to the one-year lending rate of 5.81 percent and the deposit rate of 2.75 percent.

UBS was among banks to yesterday raise forecasts for China’s inflation and growth this year, saying consumer prices may rise 4.8 percent as the economy expands 9.6 percent. China aims to hold inflation at 4 percent for the full year, state television reported last month, citing the National Development and Reform Commission, the economic planning agency.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE