03/07/2011, 00.00
CHINA
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Higher oil prices to push Beijing towards greater social justice

For well-known economist Andy Xie, protests in North Africa and higher oil prices will negatively impact an already embattled Chinese economy. If Beijing wants to avoid unrest, it must protect the interests of the more vulnerable groups rather than those of big public sector corporations.
Beijing (AsiaNews/Agencies) – Protests in North Africa and rising oil prices are creating major headaches for energy-hungry China. The country needs a lot of energy to fuel its economic development and meet the needs of its 1.3 billion people. At present, it can do so with coal-powered plants, which are however expensive, inefficient and highly polluting. Even though the mainland produces half of the world coal output, that is not enough. In fact, China has to import coal, creating a major logistical problem. Experts believe that coal supplies (domestic and imported) will not keep up with demand.

Oil is the first alternative. China's net import of crude and oil products may reach six million barrels per day this year, nearly quadrupling in a decade. If the current trend continues, China's net imports will reach 16 million barrels per day by 2020, far higher than the US’ 13 million.

The Middle East accounts for 37 per cent of the world's oil production, of which two-thirds is exported, and 62 per cent of the world's proven oil reserves. However, Unrest in North Africa and other Middle Eastern countries has pushed prices up. On Asian markets, a barrel of oil is now selling at US$ 106, with Brent at US$ 117, with the upward trend bound to continue. Uncertainty now prevails over supplies and cost.

Rising prices come at a time when the world economy is already stagnating with banks lowering the cost of borrowing to boost investments.

Andy Xie, a well-known economist, told the South China Morning Post, that the mainland is likely to experience stagflation, with high inflation and low growth. High energy prices are likely to reduce world consumption whilst increasing the cost of Chinese goods, further cutting exports.

Despite Beijing’s push for higher domestic consumption, China’s economy is still heavily dependent on exports and foreign investments.

With the government hard-pressed trying to contain inflation, higher energy prices can only aggravate the situation, increasing the likelihood of social disorder.

China has tens of millions of graduates but its labour market is unable to absorb them. Wage rises are also lower than inflation, undermining people’s purchasing power. On average, a property now costs 20 times annual income in the big cities.

Beijing can act quickly and decisively to pre-empt social unrest and eliminate injustices and social inequalities with three moves.

First, it can cut the top corporate and personal income tax rate to 25 per cent. A high tax rate usually redistributes income from the rich to the poor, but not in China, because the wealthy can set up companies and spend money for personal use out of company funds. A high tax rate is instead a heavy burden for white-collar workers, preventing them from joining the ranks of the middle class. With a high tax rate, China towards is moving to a two-tiered society, with a small class of super-rich and a vast underclass.

Second, the authorities can increase interest rates quickly to protect savings. Two hundred million migrant workers have worked very hard for very little over the past decade. They have saved money for their children's education. Now they see their hard-earned yuan at risk as the government looks on indifferent.

Third, property should not be a speculative asset. Local authorities and public sector firms have come to rely on revenue from the property sector, acting like property agents fuelling speculation. The government should introduce drastic measures, like a 90 per cent capital gains tax on property transactions. This should remove speculators and cool prices.

“Property speculation is perhaps the biggest threat to China's stability,” Xie writes. “The central government should introduce a policy to remove this risk. [. . .] For too long, China's policies have paid too much attention to special interest groups and too little to the plight of working men and women. If this doesn't change, China's stability will be put at risk. Whatever policy option is considered, top officials need to ask first whether it takes from the people, or gives to the people.”

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