While the flood of cheap Chinese clothes and shoes into the US and Europe continues to cause panic among western manufacturers and governments alike, China's top policymakers have trained themselves on another, for them, more profound question: not why China exports so much, but rather why, on balance, it tends to consume so little.
In many ways, this question is central to achieving balanced growth for China's rapidly emerging economy. The country's biggest consumers, its peasantry, still account for nearly 70% of the population, yet rural incomes and consumption have failed to keep up with the general economic growth, which has averaged around 9% in recent years. The only way to get the rural poor consuming more, and thereby ensure that development is after all sustainable, is to drastically raise their standard of living.
Of course, none of this is lost on China's leadership: agricultural reform and the welfare of its rural poor are squarely at the top of the economic reform agenda. It is also a task that's occupied much of Jin Renqing's two years as China's finance minister.
BALANCE AND HARMONY
'It is one of the important goals of the government to realize the balanced and harmonious development of the country,' Jin tells Emerging Markets in an exclusive interview. 'Reform in China, and also through the ministry of finance, is centring on the overall objective of the country, and that is to build a socialist market economy with Chinese characteristics.'
Boosting domestic consumption, and by extension, closing the gap between rich and poor, between regions and between urban and rural areas, is his top priority. Jin is keen to point out that the special character of the Chinese economy - namely, that the bulk of the population live in rural areas means that the key issue is 'to improve the income of the farmers.'
To be sure, improving the lot of the poor peasants was always meant to be part of China's economic development strategy, since Deng Xiaoping launched his ambitious economic reforms in 1978. The country has, after all, managed to lift over 250 million people out of poverty in the last two decades.
Yet the overwhelming urban bias of China's development has meant that rural regions have fallen further behind cities and coastal areas. The government, meanwhile, has committed itself to quadrupling overall income levels by 2020. 'We must provide more encouragement for solving the issues of rural and agricultural development,' Jin says.
FISCAL POLICY FOR THE POOR
The proper application of fiscal policy is at the heart of Jin's reform efforts. In recent years, the government has undertaken a momentous push to place public finances on a sound footing, while creating a level playing field for development, growth and investment. To make fiscal policy 'pro-poor', Jin points out that his government is also committed to redirecting resources, so as to achieve a more progressive distribution of burdens and benefits.
Yet in the past year, fiscal policy has been vital in another respect: it has helped usher in what Jin believes is a long anticipated 'soft landing' for the economy. 'We have full confidence in a soft landing,' he says.
Indeed, in recent months, China seems to be managing precisely the soft landing that it wants. The government has acted earlier and more decisively than it did in the mid1990s, curbing growth before it gets out of hand. Policymakers have also been more sophisticated, targeting selected sectors with administrative actions while shifting to market-based measures, including last October's increase in interest rates, to rein in money and credit growth.
On the whole, the economy appears to be more balanced. In fact, there are now signs that consumer spending is finally doing more to support the economy, alongside fixed investment and exports. The countryside is finally playing a part: after six years of meagre growth, rural incomes rose by 12.5% in the first half of the year. In general, rising incomes are boosting households' spending power. Retail sales rose by 13% in the first half of this year, compared with the same period of 2004.
Jin credits these results in part to what he says has been a change 'from a proactive fiscal policy to a prudent fiscal policy'. Under this approach, says Jin, the government will maintain the overall volume of fiscal revenues and public expenditures while also carrying out 'a certain amount of necessary restructuring'. To this end, his ministry has embarked on a comprehensive reform of public finances, which, he argues, 'is the economic foundation for a country and also a central focus of China's economic restructuring'.
PRUDENCE
'Prudent' fiscal policy, says Jin, aims to curb any signs of inflation while stemming the possible recurrence of deflation, China's most recent economic headache. At 2%, inflation is under control while GDP growth, at 9.5%, is 'right', he adds. Under these conditions, Jin believes the prospect for development is 'relatively good'. Economic policy, he says, must now focus on a 'carefully designed urbanization drive' for rural workers to move to 'new developed' areas.
Jin acknowledges that although markets play a 'primary and very fundamental' role in resource allocation, the government has nevertheless 'tried to play a central role in macro regulation to offset those market forces' while ensuring that the economy grows 'in a stable and rapid' manner.
But Jin is still mindful of the challenges: among them, preventing key sectors, like real estate and construction, from overheating, while at the same time rendering support for the 'weaker points: agriculture, rural development, through budgetary support'. Other target areas for support include employment and social security, environment and ecological construction, public health care, education and science and technology.
Public finance reform also brings with it certain important obligations. 'On the one hand, we have to offer substantial material guarantees for the reform and development of the country. One the other hand, it is one of the important demands of macro regulation of the economy for the government to control the economy.'
Tax reform has been another major thrust of the ministry's work. 'We would like to have tax policy play a more important role in the reallocation of resources and the development of a more balanced society,' Jin says. Since the first reforms in 1994, government revenue has shot up from RMB300 million to in excess of RMB3 trillion in 2004. Jin says he will use the tax revenue to broaden the reform effort and help 'meet public demand for public services'.
RURAL TAX REFORM
Under Jin's guidance, the reform of ad hoc rural fees and taxes was also stepped up last year after more than four years of experimental reform. The reforms replaced harmful ad hoc levies with standardized, regular taxes as a way to reduce farmers' burdens - a key element in maintaining stability in rural areas. China's premier Wen Jiabao has promised that agricultural taxes will be abolished within five years.
'The government has abided by the principle of lowering tax rates, strengthening tax management and strengthening the national revenue control,' says Jin. The ministry has also been putting in place the basic building blocks of a modern national tax administration. Improvements in tax administration have already contributed significantly to higher collections. These efforts are likely to continue to offset the revenue impact of some other tax policy changes, such as reductions in agricultural taxes.
Central to this effort is developing the right institutions to 'control and regulate' the economy, says Jin. In order to improve the efficiency of public spending, his ministry has also implemented a number of budget and treasury reforms in order to establish a transparent and efficient basis for managing public finances and sustaining growth.
The Emerging Markets award for Finance Minister of the Year is based on nominations from investment banks, analysts and economists.