By Xin Zhiming (China Daily)
Updated: 2008-03-22 09:46

China could reduce its overall trade surplus by lowering the national saving rate and reforming taxation to encourage domestic consumption, President of the US National Bureau of Economic Research Martin Feldstein said.

China's national saving rate is more than 40 percent of its GDP. Reducing the saving rate by increasing both household consumption and the level of government spending on public health and education programs would help China reduce dependence on foreign demand, Feldstein, who is also a professor of economics at Harvard University, said in a paper to the China Development High-Level Forum.

China's trade surplus stood at $262 billion last year. Although the growth rate is set to lose momentum this year because of the global economic slowdown and China's policy of reducing dependence on foreign demand, the volume could still hover around $300 billion this year, analysts said.

Feldstein said that because China enjoys sound fiscal conditions - it has a relatively low level of national debt and its official annual deficits equal only about one percent of GDP - the country is able to carry out consumption-stimulating tax policies and increase government spending.

China registered a total fiscal revenue of 5.13 trillion yuan ($727.40 billion) last year, up 31 percent year-on-year. The growth rate of the nation's fiscal revenues has remained strong in recent years.

Feldstein suggested several ways for China to encourage consumption, including increasing people's disposable income and spending more on the country's education and healthcare.

"One way to increase the disposable income of the household sector is to encourage firms to raise the currently extremely low dividend rates," he said. The government could do this by taxing the retained earnings of private firms more heavily than it taxes dividends.

In addition, the government could mandate that State-owned enterprises pay out their annual surpluses instead of keeping them in the firm, the professor suggested. "These reforms would not only raise consumption and overall demand but also would improve the efficiency of capital investment by making firms compete for funds."

A better mortgage market and a consumer credit market would allow individuals to pay for durable products as they consume them instead of having to save in advance, which will also boost consumption, he said.

A better health insurance market would reduce the need for individuals to accumulate funds in anticipation of potential medical expenditures and an expanded pension system would reduce household retirement saving, encouraging people to spend, he said.