Why China Is Too Scared to Spend

This month marks the 30th anniversary of Deng Xiaoping's economic reforms in China. But rather than celebrating, officials are in a panic. The global economic crisis has rammed home the message that China's old export-driven development model won't work forever; last month exports were down for the first time since February 2002, and overall GDP growth has dropped from nearly 12 percent last year to a projected 8 percent in 2009. Economists and party leaders now agree: the only way to keep China humming is to boost domestic consumption. That means getting Chinese people spending. But there's a problem. China's social-security network is broken, badly, and nowhere are the problems worse than in health care. A serious illness can still wipe out a family's savings. As long as that's the case, ordinary citizens will keep sticking large chunks of their income under their mattresses. And while that lasts, consumer demand will lag.

It's not that China doesn't have the money. Just the opposite: Chinese householders currently sit on savings worth $3 trillion, thanks to a savings rate of more than 25 percent, or about 16 percent of GDP—which is higher than all OECD countries, according to the World Bank. In theory, that cash could help China out of its conundrum. "We have a large domestic market. Savings are high, economic reserves are high," Vice Commerce Minister Yi Xiaozhun told a nervous gathering of elite Chinese entrepreneurs on a recent weekend. The government has already tried to allay fears with a stimulus package worth $586 billion, which Beijing will use to counter the effects of factory closures. But it plans to do this largely through infrastructure spending. According to the cabinet-level National Development and Reform Commission (NDRC), some 45 percent of the package will go to projects such as new railways, ports and power stations. Meanwhile, only one percent of the total stimulus spending is pegged for health care, culture and education.

A growing pool of experts argue that that represents a missed opportunity and is unlikely to help China long-term. Huang Ming, a Cornell professor who teaches at Beijing's Cheung Kong Graduate School of Business, sums up a widely held view when he says, "It's in the interest of the government to develop the social safety net fast. It will stimulate consumption. [Chinese] save because they are frightened of getting sick." The costs of illness can be ruinous. A better health-care system would unleash domestic spending and thereby boost employment, especially in retail and services. It could even offset the social unrest Chinese leaders fear will come with slower growth. "If you have nationwide health care, people are less likely to go on the street," says Huang.

Yet tackling China's vast medical crisis is daunting. Even President Hu Jintao acknowledged in 2006 that "medical-service fairness is declining and medical fees are too high for most people to afford." He called for faster development of rural services, a network of city clinics, timely treatment and safe drugs at affordable prices.

But progress has been glacial, centered on pilot studies and exercises more visible to experts than the public. In October 2008, the NDRC issued a road map for reforms. But the document was vague and said little beyond confirming that health-care reform is "an urgent expectation of the majority of Chinese people."

That's putting it mildly. While the 30 years since Deng's reforms have brought scorching growth, in terms of health care China has moved backward. Hu Shanlian, a health economist who has been advising the Chinese government for 17 years, says there's been "great change since the 1960s," when there was "quite a good network for farmers to seek health care," including a broad system of "barefoot doctors" in village clinics as well as decent and affordable hospitals in towns. In the 1980s, this system collapsed when market reforms did away with the communes that funded such facilities. Something similar happened in cities, as state enterprises were privatized or laid off workers, cutting them off from the work-unit-based welfare net. In 1980 only one fifth of health-care costs were paid out of patients' own pockets, but by 2005 that had risen to more than half.