As described in a recent HSBC report, China will shift its stimulus spending away from new infrastructure to education and healthcare in 2010. With GDP growth hitting 10.7% in Q4 2009, Beijing policymakers are now focusing on ensuring that the recovery creates more balanced growth. Switch- ing spending to education and healthcare is seen as key to achieving this goal. Over 70% of the RMB 4 trillion stimulus package was put into infrastructure projects in 2009. This ratio should come down to around 40% in 2010, with the rest being spent on education, healthcare and other areas that encour- age domestic con- sumption.
The substantial increase in government spending on education and healthcare, along with easier access to credit, will reduce the household savings rate by about 5% in the next 3 years. There are many reasons for the household sector’s high savings rate of 35%. Some, such as demographic trends, are structural and will take decades to change. However, concerns about the rising cost of education and medical care as well as borrowing constraints contribute around 30% to the high rate of savings. The substantial increase in fiscal spending on education and healthcare and a rise in consumer financing should persuade people to start saving less and spending more.
Rising private consumption in China will occur in both urban and rural locations. Urban consumers are likely to continue to spend on cars, their homes and other durables while increasing spending on services.
Rural consumption will focus on better quality food, home appliances, telecommunications and transport. The central government recently finalized a plan to overhaul the healthcare system that involves a total of RMB 850 billion in new spending (RMB 330 billion from the central government) by govern- ments at all levels over the next 3 years. The plan should put 90% of the population under basic medical insurance coverage by the end of 2011. This will be done by expanding coverage of basic medical insurance schemes for urban residents and a new co-operative medical scheme for rural residents. An urban resident would be covered up to a maximum of six times the local average urban disposable income or annual salary, depending on the scheme; the ceiling for rural residents equals six times average net income.
China has also started rolling out its basic medicine system to provide the…
