By Jason Subler
BEIJING, Dec 1 (Reuters) - China's slowing growth could be just the spur the government needs to accelerate long-planned reforms to its health care system that will be central to efforts to boost consumption and rebalance the economy.
Beijing has certainly made clear its determination to counter the economic downturn by launching a 4 trillion yuan ($586 billion) stimulus package in early November.
But much of the flagged spending focuses on infrastructure projects such as railways and airports, which can quickly create jobs and give the economy a boost.
That has prompted concerns that the government could make China more reliant than ever on industrial investment and exports, potentially adding to global imbalances and even sowing the seeds of future property bubbles and sour loans.
In the end the opposite may prove true. Widespread layoffs sparked by slowing foreign demand could bring a greater sense of urgency to the task of kick-starting consumption, finally giving health care reform and other strands in the social safety net the attention that economists say they deserve.
"A lot of problems come to light when things start to slow down or when there are increasing levels of stress in the economy," said William Hess with IHS Global Insight in Beijing.
"Things that could be glossed over during the boom years become much larger priorities. Even though this is something that many have been calling on them to address for years, I think the pressure on the government to really do something significant will increase."
SHODDY, DAUNTING
The problem is well recognised: faced with shoddy health care and welfare systems, many consumers are forced to save rather than spend in case a family member falls ill or loses their job.
With household consumption accounting for only about one third of GDP, China is more vulnerable to weakening exports and is undershooting its potential as an engine of global growth -- as seen in an unexpectedly abrupt economic slowdown recently.
To be sure, Beijing has laid the foundations of a basic rural medical insurance system. And the government in October published the draft of a medical reform plan that articulated the broad aim of providing affordable treatment for all.
Yet the task ahead is daunting. Health care costs took up half of household incomes in 2006, according to experts led by Hu Shanlian of Fudan University in Shanghai.
"The average cost of a single hospital admission is now almost equivalent to China's annual income per head and is more than twice the average annual income of the lowest 20 percent of the population," they wrote in The Lancet medical journal in October.
World Bank data show public spending in China on health care accounts for only 1.8 percent of gross domestic product, compared with the global average of 6 percent.
Problems with the health care system have their roots in excessive marketisation after the dismantling of cradle-to-grave welfare starting with the economic reforms launched in December 1978, said Christopher Spohr, a social sector economist with the Asian Development Bank in Beijing.
With little government funding, hospitals often over-prescribe drugs and diagnostics to generate revenue, leading to spiraling medical bills, much of which are paid out-of-pocket.
Spohr said the government needed to stitch together a more coherent medical insurance system from the ones now in place.
"They need to think about incentives. You need to get the incentives right, and you need to back those incentives up with supervision mechanisms."
FRUSTRATION
There are signs that the chilly economic climate could force Beijing's hand to do more -- and more quickly.
The vague wording of the draft medical reform plan has drawn unusually vocal criticism in the media and online, giving a sense of the growing frustration over big medical bills.
With the economic slowdown heightening the government's concerns over social stability, Beijing will be keen to address such an obvious flashpoint for discontent, analysts said.
"That's the most basic social safety net that was there before the reforms kicked into high gear," said Ken Peng with Citigroup in Shanghai.
"It's something that the people consider they had and lost. That definitely has created a bit of friction in the social fabric and caused the government to lose some credibility. So that's definitely a primary objective for policy."
So severe is the strain of high costs that it often leads to physical violence. In the first ten months of 2006 alone, more than 5,500 doctors were injured by angry patients or relatives, Qiu Guixing, a leading orthopaedic surgeon, said in March.
Louis Kuijs, senior economist with the World Bank in Beijing, said he was encouraged that the government was aware of the need to do more and that initial results were already showing up.
"There's a long way to go but we have seen an impressive start in the rebuilding of the role of the government in health, education and the social safety net."
Still, such improvements will take time to start translate into consumer spending, said Andy Rothman with CLSA in Shanghai.
"The rebalancing is not a short-term issue. This is a decades-long process," he said. "And that's okay. You wouldn't want to try and rush something as fundamental and structural as that through that much more quickly." (Additional reporting by Alan Wheatley; Editing by Jan Dahinten)