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Distribution system undergoing a change
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Researchers have noted that China's limited consumption and overheated investments are caused by ever increasing deposits. In China the savings ratio is much higher than the investment rate. By analyzing this phenomenon more closely, it is easy to see that excessive savings are a result of the current income distribution system, which needs improvement. The government has noticed the problem and decided to make a change.

Statistics from the World Bank indicate that in 2006 China's household savings accounted for 15 percent of the GDP; government savings (fiscal revenue) 7 percent. But corporate savings (including profits) went up to 28 percent, a big leap from 14 percent in 2002. During recent years, with sluggish salary hikes and yet an improved taxation system, a better part of the nation's incomes have been flowing to the governmental departments and enterprises instead of into the hands of ordinary citizens.

Decades of fast economic growth have brought benefits to ordinary people. From 1989 to 2004, the salaries of ordinary Chinese increased 110 percent in real terms. But according to The Report on China's Enterprises Competitiveness issued by the Institute of Industrial Economics under the Chinese Academy of Social Sciences, the ratio of workers' wages to GDP fell by 12 percentage points in the past few decades while the ratio of corporate net profits to GDP increased by 7.7 percentage points. The report's author, Jin Bei, said that during the early stages of the reform and opening-up scheme, a common concern in state-owned enterprises was that wages would eat into profits. Now the worry is that the profits would eat into wages. Jin also said that an imbalance in income distribution exists in both private and state-owned enterprises: wage increases always fail with economic growth in private ventures; state-owned enterprises, however, tend to employ a large number of temporary workers to cut production costs.

The central government has noticed the problems with the income distribution. During the 17th National Congress of the Communist Party of China held in October 2007, the authorities decided to create more opportunities for the public to get property incomes. This is a positive move that the central government took to change the current distribution system. But it is going to be a tough task because society is lacking interchanging channels among household savings, government savings and corporate savings.

Limited expenditures on pubic affairs on the part of government, as the current situation is, make the public feel uncertain about their lives and prod them to save more money. As for the state-owned companies, they were allowed to retain their profits during past two decades, which the authorities viewed as a performance incentive. With business improving, they saw their profits soaring. These profits, plus bank loans and funds raised from stock markets, became a means for corporate investment and eventually pushed the economy to the verge of overheating time and time again. But the government did not benefit as much as it should have from its enterprises' substantial improvements.

As a result, the government has now decided to take its cut. In May 2007, whispers spread from the State Council Executive Meeting that the central government would collect dividends from all state firms under its direct control. In December, the authorities issued the Management Methods of Collecting State Assets-generated Profits of Central Enterprises. Based on regulations, the Ministry of Finance could collect anywhere from 50 to 80 billion yuan in 2007. Most of the money would be earmarked for social welfare projects as a way to balance wealth distribution.

( by Pang Li, January 4, 2008)

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