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Time not ripe to leave all to market

By Hong Liang (China Daily)
Updated: 2008-06-24 07:43

There is usually little new in what the World Bank, or any other foreign analyst, has to say about the Chinese economy.

I am sure that the economic planners know by heart the potential problems associated with negative bank interest rates. Of course, they don't need to be told of the rather basic monetarist tool of raising the cost of money to combat inflation.

Rebalancing the economy by allowing the renminbi to appreciate further than it already did against the US dollar is a topic that has been analyzed to death. And nobody can be sure what economic model to follow to arrive at the so-called "equilibrium" exchange rate without the test of full convertibility.

If the Chinese authorities have been procrastinating in taking actions that appeared so obvious to foreign economists, they did it for good reasons. In making any major decision, the economic planners have demonstrated their understanding and consideration of the impact it may have on the livelihood of the people who have yet to share the full benefit of economic progress.

The latest domestic oil price adjustment is a case in point.

For months, economic analysts around the world have postulated that China's fuel oil subsidies were an anomaly that has become increasingly unsustainable against the backdrop of escalating crude oil prices. Their logic is of course simple, straightforward and, from a purely academic standpoint, irrefutable. Because the increase in crude oil prices, which have already risen by an average of more than 40 percent in the past several months, is expected to continue, the projected surge in government subsidies could pose a strain on the public coffers.

More important to anti-subsidy proponents, perhaps, is the argument that by artificially keeping prices low, the government has shielded consumers from the economic realities that would have required greater efforts in conservation.

But those economists who have argued so eloquently for the removal of China's fuel subsidies seemed to have overlooked the fact that China, despite its impressive economic progress in the past 30 years, has remained largely a developing country.

Despite efforts to balance economic growth, income distribution in China is still uneven with the bulk of the wealth concentrated in the hands of a small proportion of population in the major cities and the industrialized coastal regions. To be sure, the living standard of the average Chinese family has improved greatly in the past 30 years of economic reform. But the income of the majority of people, even in the highly developed urban areas, has remained relatively low.

The average workers' income in Shanghai, for instance, was 23,623 yuan a year in 2007. Anyone who has ever lived in Shanghai in recent years should understand that a person with an income of not much more than 2,000 yuan a month in that city would have a tough time making both ends meet.

Subsidies are widely seen to be an antithesis to the free market principle. But this principle cannot be applied in its entirety to the Chinese economy at its present stage of development.

In allowing the prices of gasoline and diesel to rise last week, economic planners have devised a host of provisions to minimize the impact on the less-well-off segment of the population. For example, additional subsidies are given to bus companies and other operators of public transport to cover the cost increase so that it will not be passed onto commuters.

Our economic planners are willing to take the time and efforts to design such a comprehensive scheme because they understand the potential brutality of market forces if they were allowed a free rein.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 06/24/2008 page8)