Institutional reforms can help unlock savings

Editor's note: China's economy has transformed from lengthy periods of shortages to one of surpluses, said Wu Xiaoqiu, dean of the National Academy of Financial Research at Renmin University of China. Wu was speaking to Seashell Finance, a financial news outlet of Beijing News, about ways to stimulate consumption in times of "surpluses". Below are excerpts of the interview. The views don't necessarily represent those of China Daily.

Back in the 1980s, the country's focus was on how to address shortages in supply. By turning the planned economy into a market economy, the country established incentive mechanisms and unleashed productive forces. But the toolbox designed to address supply shortages in the past is no longer suitable for the current circumstances, as overcapacity is widely seen in many sectors.

China has remained the largest manufacturer in the world for about 15 years, which speaks volumes about its strengths on the supply side. But in times of a "surplus economy", the logic which guides governance must undergo a fundamental transformation.

On the supply side, the focus of growth should shift from simple expansion to structural upgrades and technological improvements. On the demand side, we must review the significance of consumption from a theoretical perspective, and establish a mechanism to balance supply and demand.

Consumption is a key force for maintaining the balance of the economy. In the current circumstances, institutional reforms to increase income, wealth and social security are needed to help boost consumption.

Market entities, including private companies, play a major role in generating employment. It is unrealistic to expect the public sector to provide all the jobs needed. We need vigorous market entities to create jobs and lay a solid foundation for greater consumption.

Therefore, improving the business environment and protecting the legal rights and interests of all types of companies so that they can thrive is essential to address employment issues and increase people's incomes, thereby driving up consumption.

The scale of consumption depends not only on people's current incomes, but also on the wealth they have accumulated and its stability. The household wealth in China is structurally imbalanced, with about 60 to 70 percent locked up in real estate and other immovable assets. When housing prices fall, people's wealth shrinks, leading to their reluctance to spend.

To address this issue, greater efforts are needed to develop the capital market and readjust the structure of household wealth. A law-based environment is also necessary to protect existing household wealth.

Social security plays an important part in readjusting people's consumption. The high household savings rate in China stems from traditional culture and reflects that people are cautious about the future. However, in the time of a "surplus economy", an undue level of precautionary savings hinders demand.

To unleash the purchasing power "locked" in savings, the social security system must be improved to reduce people's worries about the future. This requires a fundamental change in how government revenues are spent, with a greater proportion being used for social security, making payments to low-income groups and other efforts to uphold social fairness.