Let a Billion Consumers Bloom; Subsidies to encourage consumption distort China’s economy

April 25, 2013, 12:24 p.m. ET

Let a Billion Consumers Bloom

Subsidies to encourage consumption distort China’s economy.

The 7.7% growth rate China clocked for the first three months of the year was lower than economists had expected, and now Beijing is looking to stimulate domestic consumption instead of its usual reliance on manufacturing exports and investment. Uh oh. This wouldn’t be the first time the government has gone down this route. In 2009 it rolled out a range of consumption subsidies, such as the Chinese version of “cash-for-clunkers,” to encourage new-car purchases, handouts for rural households that bought new appliances, and even a subsidy for new motorbikes. This was only part of the broader four trillion yuan ($647 billion) stimulus plan Beijing rammed through that year, but it led to some of the most positive headlines out of China’s economy, especially concerning sales of new cars.

That stimulus was less than it was cracked up to be. Consider the case of automobiles, in which roughly 6.4 billion yuan in government money subsidized the purchased of 459,000 new cars in 2010 alone. Some observers hailed this as a policy success. But subsequent events have shown that—like its American counterpart—the Chinese auto subsidy mainly stole consumption from the future by encouraging car buyers to shift forward purchases they would have made anyway. New car sales fell precipitously as soon as the subsidy program ended.Then there was the program that gave assistance for purchases of household appliances in rural areas. This, too, was trumpeted as a screaming success, with millions of refrigerators, televisions, washing machines and air conditioners sold, many to families that had never owned such conveniences.

Yet this supposed success also came at a long-term cost. Smaller, less efficient manufacturers were kept afloat by the windfall created by the subsidy, and other manufacturers felt less compulsion to invest in research and development since government cash meant customers needed less persuading to buy than they otherwise would have.

Although it’s conventional wisdom to say China needs “more domestic consumption,” that’s only partly true. China’s greatest need is to transform into a more entrepreneurial, free-market economy than the largely state-directed, investment-heavy version of today. Rising domestic consumption—especially consumption of services, which Beijing may try to target if it launches a new round of subsidies—would be one symptom that such a transformation is occurring, but it won’t do China much good on its own.

If Beijing truly wants a rebalanced economy, the focus needs to remain squarely on liberalization, especially in service fields such as telecommunications, transportation and financial services that form the backbone of most consumption-dependent economies. Temporary efforts to boost quarterly consumption data through subsidies or other incentives would be a step backward to the old model of government intervention.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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