Wednesday, May 2, 2007

China's Golden Week

Mainland China introduced its "Golden Week" holidays in 1999, giving workers 7 days off in order to stimulate domestic travel and consumption. It currently has 3 such golden weeks; the "Spring Festival" (Chinese New Year) in January or February, "Labour Day Golden Week" (starting May 1) and "National Day Golden Week" (starting October 1). What is the effect of these on the economy? Should they be extended, or shortened?

The common perception is that the "Golden Week" holidays have had mixed success in stimulating domestic consumption. I would be more harsh, and argue that they've been a failure. The main driver of economic growth in Mainland China has been export growth, especially with the United States. China has opened up to the rest of the world economy and, as a result of cheap labour and economies of scale, has transformed itself from an impoverished state into a less impoverished factory for the world's consumers.

But missing almost entirely from this transformation is consumer demand. Estimates of domestic savings suggest that households save approximately 50% of incomes (compared with negative savings in the United States, for example). Consumption demand remains tiny relative to income levels, with or without forced vacations for workers.

A more important question is why households choose to save so much instead of consuming it. Households should use their savings to seek to smooth their consumption levels over their lifetimes. In an economy with high growth rates (and therefore projected higher income levels in the future), this would suggest low savings rates now, to be made up by higher savings rates later- which is the opposite of what we see!

So why do households save so much today? I believe this has more to do with the state of the health sector in Mainland China, combined with risk averse consumers. It is now widely recognised that good health care is practically unavailable to consumers without money, and even for the wealthy, consumer rights are limited. In response to such uncertainty, risk averse consumers will tend to save too much, to avoid the possibility of dying prematurely for want of wealth to pay for care.

Education is likely to play a role in China's excessive savings as well. As China continues to develop, an increasing share of the population will attend university. In the absence of readily available student loans, parents pay for their children's education, requiring a very high savings rate from the parents. In contrast, if the student pays for their own education by taking out a loan, repayment of that loan will require a much lower effective savings rate from the student. This is because the student, armed with a university degree, will earn a much higher income than their parents.

So to increase domestic demand, I suggest the following policy changes.

1) Reform health care. Central to this will be enforcing patient rights.
2) Ensure the provision of efficient health care insurance that is financially accessible at all levels of society. I'm sure that there are many world-leading insurance companies who would love to have a share of the health insurance market in Mainland China. Insurance companies may also play an important role in enforcing efficient care for their clients as well.
3) Ensure student loans are readily available to academically qualified students, so that individuals can pay for their education based on their own future earnings, rather than requiring high savings of parents.

I believe that these measures would have a far greater effect on consumption than any number or mix of national holidays!


Luke said...

Thanks for your post~!
For health care reform, China has nearly admitted failure...
So far as I know, educational expense for each child in China is extremely high relative to household income. Anyway, the government is taking measures to adopt a timetable to make education cheaper to those poor.

Clemens said...

In addition, it can be the case that Golden Week(s) reduce productivity.

As workers - many of them employed in foreign companies – "forget" to return to their factories after Golden Week, new workers have to be trained on the job.
Even if the job is simple, a negative impact on productivity can be expected. – It would be interesting to investigate to which extend…