Group of Thirty

Urbanisation is key to economic growth, says central bank chief

PUBLISHED : Saturday, 04 July, 2009, 12:00am
UPDATED : Saturday, 04 July, 2009, 12:00am

The mainland will need a massive urbanisation campaign to drive its economic growth in the short term, the central bank chief told the Global Think Tank Summit in Beijing.

Zhou Xiaochuan, governor of the People's Bank of China, said the country's large pool of bank savings would have to be spent mainly on building homes and infrastructure, particularly in rural areas.

Excessive liquidity stemming from China's savings glut has been called a root cause of the global economic imbalances that triggered the worldwide financial crisis.

Government officials have declared stimulating consumption to be a priority in their drive to bring down the savings stockpile. That would address the imbalance and help the country shift away from a growth model driven by investment and exports, which have left the mainland vulnerable.

'An ideal solution to the imbalance would have been to reduce savings by pushing up domestic household consumption,' Mr Zhou said. 'But in reality, we have to settle for the choice of investing the money because of the income distribution imbalance in China. To further break it down, we can't count on making industrial investment under the current circumstances, thanks to the pressing overcapacity in that sector.

'So the area with the most prominent potential, in investment terms, is urbanisation,' he said. 'After all, we have a lot of areas to urbanise, to lay the foundation for future growth in consumption.' China's savers had amassed more than 50 trillion yuan (HK$57 trillion) in deposits by the end of May, more than double the figure recorded by the end of 2005.

But most of the growth in savings came from the corporate side instead of from individuals.

The ratio of corporate savings to annual gross domestic product doubled between 1992 and 2007 to 22.9 per cent, while the household savings ratio averaged around 20 per cent, Mr Zhou said. The imbalance reflected the disproportionate ownership of wealth among a few investors rather than labourers, which would impede consumption, he argued.

The government has already begun to introduce policies to plug the gap - such as a recent move to use some of the proceeds from share offerings by state-owned enterprises for social security benefits. Still, it was hard to turn the table around in the short term, Mr Zhou said.

Troubled by plunging exports, Beijing apparently needs a more immediate cure to its problem than the long shot of consumption. Late last year, the central government launched a 4 trillion yuan stimulus package centring on building infrastructure. Many believe the worst is behind them thanks to the strong stimulus measures.

'The overall economy has stabilised and is back on the upward track,' Vice-Premier Li Keqiang said at the same event.

Mr Zhou's remarks suggested the government's priority would be investment in areas such as infrastructure and real estate, not priming the consumption pump as expected.