Buying cure
It's widely accepted among economists that China should boost domestic private consumption by leading individuals to buy more and save less. The key question is: how?
"Two big programs" Roach advocates call for doubling the investment in social security immediately to 150 billion U.S. dollars and establishing a goal of raising consumption as a share of the economy from 36 percent to 50 percent within five years.
"What I think is missing here is the social safety net, social security pension and unemployment insurance. Because of the absence of the safety net, China has seen a high level of precautionary saving," he said.
Roach suggested that China develop a private pension system in particular so total employee compensation could rise in tandem with productivity. "Chinese companies need to partner with their workers and provide medical care [and] retirement investing for their workforce. Chinese workers' total pay package should have both wages and benefits," he said.
Liu agreed that the primary task in expanding consumption was to raise incomes. "Securing the legitimate interests of workers is particularly significant when the economy slumps. It would be like drinking poison to quench one's thirst if businesses sought to expand corporate earnings at the cost of workers' pay and benefits," he said.
Low labor costs and massive capacity have propped up China's prosperity over the past decades. But the proportion of wages to national income has been on a long decline since the 1990s.
Between 2002 and 2006 alone, economists estimate the figure dropped from 62.1 percent to 57.1 percent. Meanwhile, the contribution of consumption to GDP growth fell from 43.6 percent to 38.9 percent.
"A more meaningful index to judge the sustainability of China's economic growth would be the proportion of wages to national income," Liu said. "If this ratio did not rise, people would remain poor, and thus expanding consumption would be empty talk."
Chinese are far from wealthy. Only 4 percent of the workforce, and just 10 percent of the urban workforce, earn more than 2,000 yuan a month, the threshold for individual income tax.
As Chinese residents hold 2.43 trillion yuan in aggregate deposits, economists say one immediate way to boost consumption would be to stabilize spending on staple property -- including housing and automobiles -- and support tourism and cultural activities.
"People spend much of their money on housing and food. The government should encourage people to entertain themselves more," Wang said.
China 'no locomotive'
Although China might be the first major economy to recover from the downturn, economists disagree on when China will return to sustained high growth.
Morgan Stanley, for example, has forecast a firm recovery by mid-year, but said sustainable growth through 2010 would still hinge on what happens in other countries.
"China will be stronger. But will that strength be enough to allow others to follow in its footsteps? I don't think so," said Roach.
"Most of China's resilience comes from infrastructure building, roads, property consumption ... [this] won't have an impact on the United States and Europe. This resilience is only temporary while its stimulus is local rather than global."
Central bank governor Zhou Xiaochuan also warned in late April during World Bank-IMF meetings in Washington that the rebound in China's economy had to be consolidated. He said conditions in China would permit rapid economic development again, once macroeconomic policies such as the stimulus plan took effect.
Challenging internal and external conditions, he said, included continuously shrinking external demand, a relatively large decline in exports, overcapacity in some industries, falling government revenue and lingering employment pressure.
As China emerges from the shadow of the downturn, together with many of its Western partners, the world is closely watching the socialist market economy that it is still trying to develop.
It was interesting to see that there was much "the ideologically-constrained West" could learn from China, just as there was much China could learn from the West, said Roach.
"China has gone slow in many areas, especially in the opening up of its financial market. But China made the right choice," he said.
"Focusing on stability is a huge plus for China. But the nation must be vigilant in its financial policies, especially monetary and regulatory policies, and not allow asset bubbles and financial innovations it doesn't understand," said Roach.
(Xinhua News Agency May 4, 2009)
