CHINA LOOKS TO GUARANTEE INCOMES By James Kynge in Beijing
Chinese policymakers are drafting proposals for an unprecedented issue of social guarantee bonds in an attempt to reassure the country's lowest paid workers, the unemployed and pensioners that they can expect a steady stream of income.
The proposal, for which government approval is still required, is part of a series of measures that policymakers are putting forward to head off a deepening deflationary spiral. Deflation is driving down corporate profits, triggering lay-offs and eroding consumer demand.
Retail prices fell by 3.2 per cent in the first five months of the year compared to the same period of 1998, and dropped by 3.5 per cent year-on-year in May.
"Deflation is basically a psychological problem. These bonds would provide a guarantee for the poorest people in China that they will be paid," said one government official backing the proposal.
"Giving money to the poor is an effective way to reflate. The poor have to spend just to get along. They don't have the ability to put everything they get into the bank," he added.
Officials declined to divulge how big a social guarantee bond issue had been proposed. But one said it would, if approved, be "significant".
Chinese officials estimate that 16m-18m urban workers are unemployed. Several millions more are classified as xiagang - not working, but still drawing a minimum wage of around Rmb 200 a month. Another category comprises those who are registered as employed but who do not get paid, sometimes for several months.
Finally, millions of pensioners in China do not draw pensions because the state enterprises they used to work for have closed down.
The hardship that these people suffer has been reflected in regular public protests and in weakening consumer demand - the main cause of deflation.
Beijing's recent identification of deflation as the economy's most pressing problem has spurred the authorities to come up with several proposals on how to address it.
Officials said it now appeared likely that the government would approve an increase in the wages of civil servants, and workers in hospitals, educational establishments and some other state bodies. The scale of the raise has not yet been decided, one official said, but it will not be less than 35 per cent.
It also appears likely that Beijing will top up an infrastructure spending programme that was launched last August with a Rmb 100bn special bond issue. The size of the new issue remains undecided but Lou Jiwei, vice minister of finance, said recently that a Rmb 25bn tranche was planned.
Some government economists said the finance ministry was opposing aspects of the planned reflationary package because of the impact it could have on strained central government revenues. A total of 42.8 per cent of central finance revenues of Rmb 548.3bn last year was spent servicing existing debt - a high proportion by international standards.