Pettis’ final question is:

1. What mechanism can be implemented to increase the growth rate of household consumption?

The correct answer is invest. Through more investment, China can consume more in the future.

To quote Warren Buffett, investment is the:

“… transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power … in the future”

As well as this describes the decision of an individual, it describes the decision of a nation. Investment in China today, creates the conditions for more consumption in the future. The question for China and its observers is whether more consumption in the future is the right trade-off to make at this point. I would argue, on the basis of inequality, that it is.

There are four inequalities that, in my mind, would be exacerbated by a substantial shift towards consumption at this stage:

1. Eastern versus Central and Western provinces
2. Urban versus Rural Chinese
3. Inter-generational inequalities
4. Environmental inequalities

Eastern versus Central and Western provinces
It maybe an apocryphal story but Deng Xiaoping is often credited with a couple of quotes:

“To be rich is glorious”

And

“Let some people get rich first”

The sentiment was obvious. China needed to open up to the world. This needed to be pursued, in the first instance, by individuals in small enclaves along the Eastern coast; Shenzhen, Wenzhou and Shanghai etc. Very scarce resources were allocated to these cities to build the export infrastructure that would increase capacity and competitiveness. It gave birth to one of the most efficient export manufacturing economies in the world. Lots of people have become rich, up and down the coast while wages until very recently have been sufficiently high to encourage an enormous migration.

Now that resources are less scarce, they can be diverted to the Western and Central provinces. This process began in the last decade and will continue to occur. It will be sustained by the urbanisation of a large rural population and substantially improving the transport networks that constrain living standards in those provinces. Ultimately it will see real wage equalisation as internal domestic markets become as profitable as global markets serviced by the export hubs.

But to stop the process would entrench the East West inequality.

Urban versus Rural
As with wages in the east of China, wages in urban areas are substantially greater than those in rural areas. This reflects the low productivity of Chinese agriculture but also the resources available to urban residents that transform their lives. My favourite example of the lift in wages possible through urbanisation is given in a documentary by the BBC. A woman shifts from $200 a year income from the farm to $2,000 per annum working in a cafe in the city.

China’s rural to urban wage differential is a source of substantial inequality. The principle source of this inequality is the hukou. The hukou, China’s household registration system limits access to urban services to those with appropriate registration. It excludes many from jobs, apartments, healthcare and other social services. But similarly it means China is not home to the favelas of Brazil nor the slums of India. Urbanisation is managed.

It’s clearly the case that China needs further liberalisation of the hukou. But to reform the hukou without further infrastructure and physical urbanisation would come at a substantial cost. It would expose China’s rural masses to the sort of urbanisation that creates enormous social exclusion in India and Brazil.

Inter-generational inequality
Consumption cannot be the answer in an ageing society. How can a country, for whom it is often said old age will come before wealth, consume scarce resources today? An ageing economy is clearly the most obvious long term policy challenge China faces. Yet, global commentators demand a consumption driven model.

The clear response to this challenge is urbanisation. Urbanisation, as I have argued elsewhere, increases the productivity of labour and lowers the cost of living. Both of these are essential to meeting the ageing challenge. It is just not appropriate for a poor and ageing economy to be using scarce resources today and not tomorrow other than to increase tomorrow’s consumption.

Environmental inequality
Last year I traveled with a group of investors to China, many of whom had not been before or recently. One morning in Chongqing a local official highlighted the environmental achievements of the city. In particular the lowering of emissions. As I remember the fall in emissions was akin to the changes made by Los Angeles though at an absolute level emissions remained higher. There was some shock at the achievement, particularly after companies in the afternoon showed they paid more than lip service to the issue.

There has clearly been a shift in China towards more recognition of environmental sustainability. Yes, pollution is bad, both air and water. But at a central government level and at a micro level there is a movement towards more sustainability. The best micro examples lie in the environmental activism behind campaigns to stop new power plants in places such as Xiamen. My favourite government example is Ordos where reforestation comes at the cost of $150 a tree (not surprising when the cost of the tree and transportation are considered). Similarly, China is becoming a leader in environmental technology.

This, however, requires investment. There is no other solution to becoming more environmentally sustainable. It means making redundant a large proportion of current productive capacity.

Conclusion
The push to raise consumption in the Chinese economy has gathered into a storm in the last two years. From a Chinese domestic perspective it is ill-conceived; suggesting it may have more to do with global issues, such as the nefarious imbalances.

This essay argues that consumption is no solution to the inequalities inherent in China, indeed, it is investment that solves the problem. China will one day consume more, in part because it must as it ages, but also because it has built an economy capable of consuming more. Consumption growth will occur because the economy has the capacity to consume more. Maybe that’s already happening, but either way, policy should not be ordered towards consumption.