Download Analysis of Economic Factors on Restricting Consumption of Rural

Analysis of Economic Factors on Restricting Consumption of Rural
Residents in China
LIU Guanbing
City College of Wenzhou University, Zhejiang, P.R.China, 325035
[email protected]
Abstract: The restricting economic factors on China's consumer demand in rural areas are mainly
peasants’ income, interest rates, income distribution, industrial structure and so on. First, income is the
uppermost factor that constrains consumption. It reflects that low income of rural residents and
uncertainty of sources of income, urban-rural income gap, reduction in expected income by financial
crisis and so on constrain rural consumption; second, the product mix available in the rural household
consumption market could not meet consumption needs of the rural residents, which depresses
consumption potential in rural areas; and third, the current financial and credit environment in rural
China is defective, so it is difficult to peasants to get loans either living or productive from the formal
financial sectors; but low-income households cannot afford civil usury. Because of lack of a sound
financial and credit environment, it is difficult to farmers to carry out large consumption; thereby it
constrains the expansion of the rural consumer durables market.
Keywords: Rural residents, consumption, economic factors, income, product mix
1 Introduction
There are many factors affecting consumer demand in rural China. It can be summarized as economic
and non-economic factors. Economic factors include farmers’ income, interest rates, income distribution,
industrial structure, etc.; non-economic factors include consumer psychology, consumer environment,
and social security and so on. In recent years, there have been positive changes in the growth in rural
residents’ living consumption; the rural consumer market has gone up. However, low income levels in
rural areas and lack of increasing stamina in long term are still problems. In 2006, there were still more
than 58% of rural residents whose per capita annual net income are below the average, and more than
63% of the rural residents whose consumption are below the average. In the past two years, the main
factors supporting the increasing of rural residents’ income are policy support, growth in grain
production and more working off farm. Currently, pulling effect of price rising in agricultural products
that increases rural residents’ income is declining, significant increasing in grain production is unlikely,
and price rising in capital goods increases agricultural production costs; all factors will restrict further
growth of rural incomes, thereby restrict further improvement of rural residents’ consumption capacity.
2 Constraints from rural residents’ income levels
Rural residents’ monetary income is the most basic and important factor that impacts rural consumption.
According to “Absolute Income Theory” of Keynes, the growth of household consumption essentially
depends on income growth; so, if farmers’ income grows slowly, the rural consumption would certainly
be difficult to prosper.
2.1 Analysis of rural residents’ income levels
According to statistics from 2001 to 2006 about changes in China's rural household consumption, we
could see there is a sustained upward trend in the total consumption of rural residents, particularly in
2005 , which reached 1.92282 trillion Yuan that increased 1677.6 billion Yuan, compared with 1.75506
trillion Yuan in 2004. At the same time, we can see it grows slowly, compared with the national total
consumption. From contrasting the percentage of rural residents’ total spending in every year to the
national total consumption, we can see the proportion of rural residents’ consumption is getting
declining, especially from 2002 to 2003 in which there had the most obvious decline, up to 2.3%. The
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most direct factor leading to the declining proportion of rural consumption is rural residents’ income
level. With other conditions unchanged, when rural residents’ income is less, their purchasing power is
lower, the demand for products and services are also less. In recent years, due to multiple currency
practices executed by government to reduce burden on peasants and to promote their income increasing,
the disposable income of rural residents has been steadily increasing; but rural residents’ income is still
relatively slow, compared to a more rapid growth in urban residents’ income. Currently, rural residents’
income level in China is still low, and the urban-rural income gap is widening.
2.2 Analysis on rural-urban income gap
The impact of income on consumption levels embodies in income levels, and income gap will also affect
consumption levels. Different income levels tend to different consumption propensity and consumer
preference, and thus are with a different consumption level and consumption structure. China's rural per
capita annual net income increased from 709 Yuan in 1991 to 3587 Yuan in 2006 with an absolute
increasing amount 2879 Yuan and increased 5.05 times. The average annual growth rate of rural
residents income is 11.78%, while that of urban residents is 14.03%. The income growth rate of rural
residents is slower than that of urban residents. Compared to growth rate of fiscal revenue in the same
period, the income growth rate of rural residents is relatively lower that was only one-third of that of
fiscal revenue; that is, with the growth of china’s economy, national revenue and resident’s income both
increased, but national revenue increased relatively faster and the income of rural residents grew
relatively more slowly.
The sloping of income distribution leads to more wealth concentrates in urban residents, which means
people with a relatively low marginal propensity to consume have more income, while rural residents
with high marginal propensity to consume cannot translate needs into effective demand. Accounting to a
time-series data of Gini coefficient estimated by the National Bureau of Statistics, the Gini coefficient of
rural residents’ net income rose from 0.21 in 1978 to 0.34 in 1995, and increased three percentages to
0.37 in 2006. The income gap between rural residents was getting greater and greater to 0.37 in 2006
that was nearly close to 0.4, the warning level. According to Keynes's law of diminishing marginal
propensity to consume, different income groups are with different marginal propensity to consume; the
rich’s marginal propensity to consume is lower than the poor’s. Under the circumstances of given total
income, the greater the income gap is, the lower the average propensity to consume is and the smaller
the total consumption is.
Because of wide gap between rural and urban income levels, producers face with the choice that whom
is supplied to, the entire population, or only high-income earners, or the low-income. In reality, the
major choices producers make are only to supply to the high-income. Therefore, the effective demand of
low-income people faces with constraints in supplying. Effective demand cannot be achieved, so the
consumption of rural residents is limited.
3 Constraints from rural residents’ income structure
Resident income is the summation of income that rural households and their members get from the
various sources during a survey period. According to the nature of income, it can be classified as wage
income, family business income, property income and transfer income. From the lateral view, peasants’
income is mainly wage income and household operating income, which influence farmers’ income
levels jointly.
3.1 Constraints from agricultural producing and operating income
Agricultural producing and operating income includes income from planting grain and cash crop, whose
percentage accounting for rural net income declines yearly, but up to now is still more than a half and
the main source of their income. The growth of agricultural production and operating income increased
slowly. It is 1931 Yuan in 2006,which is 678.5 Yuan in 1993, whose absolute amount increased 1252.5
Yuan in 13 years(Table 3.3). The annual growth rate from 1994 to 1996 was more than 20%, but that in
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other years was below 10%, and even negative in some years, such as in 1998-2000, which indicated the
slow growth of agricultural producing and operating income. In those years, growth with relatively high
rate was a government-driven growth, rather than endogenous growth.
At the same time, household operating income from agriculture is the main source. Income from
secondary industry such as industry, construction industry, and from non-agricultural tertiary industry
such as transport, post and telecommunications, wholesale and retail trade, catering, social services,
cultural and educational industries is in a secondary position. Changes in operating income of farm
families are mainly determined by factors, such as prices of agricultural products, costs of domestic
production and operation, the structure of farmers’ household production and operation.
From the agricultural cultivation of view, because agriculture is in a basic position in national economy,
so in order to guarantee the stability of price and supply of social basic commodities from agricultural
products, government do not allow a great fluctuations and rising in grain and oil products. Therefore,
under the premise of limited agricultural subsidies, this orientation in policy determines that rural
resident’s income mainly from production of agricultural products does not enhance significantly.
Moreover, China's agricultural production has not yet realized modernization operation, with less
agricultural science and technology and low added value, so farmers’ income from agricultural products
sale is only hard-earned money.
3.2 Constraints on demand from rural residents’ wage income
Wage income refers to income earned by working for other units or individuals. Wage income is the
second largest source of rural residents’ income that accounts for about 30% and shows an upward trend
year after year. Wage income increased of from 194.5 Yuan in 1993 to1374.8 Yuan in 2006 with
increasing 1180.3 Yuan and 6.06 times. Compared to the previous year's growth rate, it increased 27.4%
in 1996 and after that its growth rate is about 10% annually. It shows the growth rate of wage income
grows rapidly, its share in rural residents’ total income is almost equal to proportion of the dominant
family operating income, and the proportion is increasing. In the increasing amount of rural residents’
income, wage income increases greater than income from other sources.
At the beginning of reform, township enterprises had developed greatly. In the context of the planned
economy and shortage economy, on the one hand the market was large, and on the other hand township
enterprises were market-oriented, followed market principles and were with institutional flexibility and
competitive advantage from its beginning. The development of township enterprises was an important
factor for rural residents’ income increasing at that time. However, with the reform of economic system,
in recent years China has entered a buyer's market and there is oversupplying phenomenon on market.
The process of mercerization of urban enterprises speeded up greatly. And with support and preferential
policies from government to state-owned large and medium enterprises, advantages of urban enterprises
in talent, technology, capital and equipment fully manifest and urban enterprises enhance its competitive
power in the market. In this situation, except a few grown-up township enterprises, most township
enterprises are in trouble, which makes rural residents’ incomes to be affected. In such severe
circumstances, many rural residents choose to be migrant workers and wage income is the main source
of their income. It is because the level of economic development in urban makes the income level of
migrant workers is much higher than the farming income levels. Driven by higher comparative earnings
and expected earnings, more and more rural residents with age from teenagers to 60-year-old range
work off lands and some families even move away completely to work, which leads there are nobody to
farm in some regions.
As labor force gradually transfers to the secondary and tertiary industries, migrant workers are getting
more, therefore per capita net income of wage is increasing and accounts for greater proportion.
However, employment opportunities to work in cities for rural surplus labors change with the demand of
cities. Because there is lack of institutional protection, rural residents face with an unfair employment
environment in cities. At the same time, because of low education level, they are all engaged in jobs in
the low end of industrial chain, so their income is at a relatively low level, which will inevitably impact
consumption level. Therefore, the income of migrant workers is temporary and unstable. Especially
during current international financial crisis, large number of migrant workers lose their jobs and go back
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home. The level of wage income declines significantly, which makes a serious impact on the
consumption level of rural residents.
Income from farming and working outside are with great uncertainty for rural residents. According to
Friedman's “Permanent Income Theory”, permanent income has a greater impact on consumption, while
temporary income has a less impact. Due to lack of stable income expectations, rural residents are bound
in consumption.
4 Constraints from financial credit
If we say money is the blood of market, then the financial system is the blood circulatory system of
market. Without a sound financial system, there would be no dynamic in the market. Since the mid-90’s,
China's consumer credit started that have played a certain role in promoting urban residents’ living
standards, while China's vast rural consumer credit failed to start. At present, China's rural financial and
credit environment was not perfect, it is difficult to rural residents to get loans either living or productive
from formal financial sectors; and low-income households cannot afford civil usury. Due to absence of a
sound financial and credit environment, it is difficult to rural residents to carry out large consumption;
thereby it constrains the expansion of rural consumer durables market.
4.1 The traditional consumption concept
For a long time, lot of Chinese carry the traditional personal financing concept that are self-sufficiency,
spending according to revenue. This concept is hold by China's vast rural residents in particular.
Influenced by the impact of the peasant economy, rural residents are hard-working, wealthaccumulating, and they neglect positive role of consumption in promoting economy. Even to those
affluent rural residents, they hold the traditional concept of saving money for shopping, dare not say
"earning for spending", have no concept of consuming by debt and don’t want to consume by debt.
This is not conducive to the development of consumer credit.
On the other hand, loan-sharking has been popular in Chinese county for thousands of years and many
borrowers suffered from it. Rural residents confuse with the nature of current consumer credit with
usury, so that they do not expect a loan for consumption. In 2006, China's total savings deposits are over
16 trillion Yuan. Although the total amount is huge, the distribution is very uneven. Deposits from the
high-income accounted for 80% of total savings, while vast rural household’s savings was about 546
million Yuan.
4.2 The rural financial system and credit management system
Although China's economic reform started from household contract responsibility system in rural areas
and gradually turned to cities, rural financial market system largely maintains to be the pre-reform
situation; the development of financial system in vast rural areas (especially in remote rural areas) is
seriously backwards and the existing credit management system cannot adapt to the credit
characteristics of rural residents as well. At present, there are not many financial services in rural areas;
apart from Agricultural Bank, Agricultural Development Bank, Rural Credit Cooperatives, Postal
Savings, there are almost no outlets of other financial institutions in the vast rural areas. However, there
appears a phenomenon that rural credit services agencies, loaning power and financial talents transfer to
the urban, which makes the backwards rural financial system even more lagged. Furthermore, rural
consumer credit is with characteristics of short term, high frequency, small amount and high risk, while
loan approval is highly centralized in the state-owned commercial banks, issuance right are highly
concentrated, which restricts flexibility and timeliness of its branches in loan granting. It’s hard to get
loans in rural area and even harder to get consumer credit, which seriously hampers the development of
credit in rural areas, affects the exploitation of rural market and the development of rural economy.
4.3 Consumer Credit Guarantee System
When issuing consumer credit, China’s commercial banks often use the way suitable to corporate loan,
emphasize credit investigation, and emphasize mortgage and guarantees. In rural China, market system
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of agricultural products is relatively perfect, but trading market for land and houses has not formed; land
and houses in rural areas largely cannot be transferred, and their property right certificates cannot serve
as collateralized consumer credit credentials, which becomes a threshold to consumer credit in rural
areas.
From rural residents’ income structure we can know that the main source of rural residents’ income is
from agricultural products and wage income. About 50% of rural residents’ income relies on the primary
industry, while income from agricultural producing and operating is vulnerable to occasional factors
such as climate and often difficult to predict. The main source of wage income is from working outside,
but there are many uncertainties for working outside. And in recent years, there is a downward trend to
the income of migrant workers. Coupled with the financial crisis, a large number of migrant workers are
unemployed and lost wage income completely. Therefore, the income of rural residents is very unstable
and it is difficult to grasp personal credit, which makes it difficult evaluate rural residents credit rating in
repayment capacity. As there has not yet set up personal integrity assessments, loan insurance, personal
credit system in China, once problems in the rural consumer credit appear, there is no corresponding
legal protection, and banks must bear considerable risks. So Banks can only hang back consumer credit,
which constrains the development of consumer credit.
5 Conclusion
There is a close relationship between peasants’ consumption level and their income levels. With other
conditions unchanged, changes in rural residents’ income level restrict their consumption level directly.
In general, when rural residents’ average per capita net income increases, their consumption level rises;
when rural residents’ average per capita net income declines, their consumption level falls. Changes in
rural residents’ average per capita net income have positive relationship with their consumption level. In
recent years, the growth in living consumption in rural areas have had positive changes and the rural
consumer market has gone up, but problems of low income levels in rural areas and the lack of growth
mechanism have existed for a long time. During the past two years, the main supporting factors for
income increasing of rural residents are policy supporting, rise in price of agricultural products and more
migrate workers. Currently, pulling effect of price rising in agricultural products that increases rural
residents’ income is declining, significant increasing in grain production is unlikely, and price rising in
capital goods increases agricultural production costs; all factors will restrict further growth of rural
incomes, thereby restrict the further improvement of rural residents’ consumption capacity.
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