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Thursday, October 13, 2005

Will Wealth Redistribution in China Make Currency Reform Easier?

This article from The Economist argues that China's recent commitment to redressing income inequality will make it easier for them to revalue their currency, but the article does not express confidence this will happen anytime soon due to China's worry that change of any type could bring about economic instability and result in political turmoil:

China contemplates change, The Economist: ...China’s leaders may finally be readying themselves for a change in the mercantilist, growth-at-any-cost model that has prevailed for decades. The Communist Party leaders’ annual meeting on economic policy ended on Tuesday with word of a strategic shift: from now on, there will be more emphasis on redressing the inequality and social disruption that market reforms have left in their wake. The most immediate worry for China’s leaders is social unrest. Last year, the government documented more than 70,000 demonstrations, attended by some 3m protesters. ... It needs the export sector to continue booming, in order to absorb surplus labour from the countryside and moribund state-owned companies. But it is aware that the rapid growth of recent years has opened fractures that could grow even wider. If China can heal some of those rifts with a greater focus on rescuing those left behind by the new prosperity, this may in turn take some of the pressure off the government to subsidise export workers through currency management. It may also help China to develop domestic demand that can take up the slack when America’s appetite for cheap goods falters...

But though details are sketchy, it seems improbable that China’s move towards more balanced economic growth will be anything like the kind of radical leap that foreign observers would like. There are some brands of wealth redistribution that would make foreign investors very jittery, such as higher taxes. Hu Jintao, China’s president, is still consolidating power; even if he had a radical vision of a China less dependent on the cravings of the American consumer, it would have to wait until his command of the party was firmer. More importantly, it would have to wait until Chinese consumers became sufficiently confident in the social safety-net and the provision of affordable health care and education that they were willing to save less and spend more. ... And though the rising tide of China’s economy undoubtedly has the power to lift all boats, there are worrying rigidities in the system, caused by the under-development of its financial system and the fact that economic reform has not been accompanied by political reform. Officials rightly fret that further economic changes could undermine the stability of the party’s rule. Amid all the talk of addressing the wealth gap, the party’s plenum reiterated a commitment to rapid growth by restating a goal of raising China’s GDP to double its 2000 level by 2010...

    Posted by on Thursday, October 13, 2005 at 12:57 AM in China, Economics, Income Distribution, International Finance | Permalink  TrackBack (1)  Comments (0)

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    » hu are you? from asiapundit

    This should be included in a China Economic Roundup, which AsiaPundit hopes to resume soon, but the Economist article noted by Mark Thoma very much relates to the incident in Taishi and is worth reading now for context.: China’s [Read More]

    Tracked on Thursday, October 13, 2005 at 09:31 AM


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