China leaving West behind?

China's Premier Wen Jiabao today delivered his government work report during the National People's Congress opening ceremony. Asserting that the drivers of China's meteoric economic rise remained firm, Wen said, "There is huge potential demand in the market, the supply of funds is ample, the overall scientific and educational level of the people is rising."

Wen said the top priority this year will be to curb price rises hurting ordinary people. The premier vowed to boost spending on education, healthcare and public housing. He aimed his televised speech partly at ordinary citizens who could become sources of anger unless grievances about prices, housing, and healthcare are eased.

According to Reuters’ reporters Zhou Xin and Koh Gui Qing, Wen's speech reflected “the confidence of a government that has presided over two decades” of “double-digit expansion.” As Wen added, "The government's ability to exercise overall control and respond to major challenges has increased significantly."

Stephen S. Roach of Yale is Chairman of Morgan Stanley Asia and author of The Next Asia. Roach is very high on Wen’s Five Year Plan. Roach maintains it will change the character of China’s economic model – moving it from the export- and investment-led structure of the past 30 years toward growth driven by Chinese consumers, a shift with broad implications for China, Asia, and the global economy.

Wen’s Five-Year Plan focuses on three pro-consumption initiatives:

First, China will downgrade capital-intensive, labor-saving productivity enhancement in favor of labor-intensive services, such as wholesale and retail trade, domestic transport and supply-chain logistics, health care, and leisure and hospitality. The employment content of a unit of Chinese services is over 35% higher than that of manufacturing and construction, meaning China can hit its employment target with lower GDP growth. Also, far less resource-intensive services offer China lighter, cleaner, and greener growth.

Second, the plan will seek to boost rural workers’ wages, which are only 30% of urban workers. It will: a) enact tax policies to increase rural purchasing power, b) broaden rural land ownership, and c) push technology that raises agricultural productivity. The plan will also foster continued rapid migration from the countryside to the cities. Since 2000, rural-to-urban migration has been 15-20 million people a year. To maintain migration at this pace, China will relax its hukou, or household registration system, which tethers workers and their benefits to their birthplace.

Third, China wants to shift from consumer saving to spending, which means building a social safety net of social security, private pensions, and medical and unemployment insurance. In 2009, China’s retirement-system assets totaled just RMB2.4 trillion ($364 billion), or about $470 of lifetime retirement benefits for the average Chinese worker. Little wonder Chinese families save out of fear of the future.

Roach believes the Five-Year Plan will boost private consumption as a share of Chinese GDP from its current rock-bottom 36% to the 42-45% range by 2015. That would represent a huge boost for China’s major trading partners, and could spark the greatest consumption story in modern history.

Of course, as China reduces its surplus saving, it has less to fund the West’s ongoing saving deficits, especially that of the U.S.