China hopes domestic spending will make up for slowing exports, but analysts say Chinese consumers are unlikely to pick up the slack.
China's economy slows drastically
BEIJING // As the global financial crisis spreads across the Asia region, China hopes domestic spending will make up for slowing exports. But according to analysts, Chinese consumers are unlikely to pick up the slack. The world's fourth-largest economy expanded by nine per cent in the third quarter, the lowest level since the second quarter of 2003, the government reported yesterday as it called for a sharper focus on domestic sources of growth.
"The potential for domestic demand is quite large, and there's considerable room for expanding domestic demand," said Li Xiaochao, a National Bureau of Statistics spokesman, as he released the third quarter figures. As China prepares to celebrate the 30th anniversary of its economic reforms later this year, the credit crunch is forcing the country to question how sustainable its export-led growth model is.
In an alarming sign of things to come, thousands of people have been laid off in recent days in southern China's export hubs as toy and other factories that have sold to the developed world have gone bust. On a macro level, the country's trade surplus for the first nine months of the year reached US$180.9 billion (Dh664bn), down 2.6 per cent year-on-year, the customs administration said last week.
This was a major factor in pulling overall growth in the first nine months down to 9.9 per cent, making it very likely that this will be the first year since 2002 that China's economy expands by less than double digits. However, shifting to growth based on domestic factors - consumption and investment - is easier said than done, argued Ren Xianfang, a Beijing-based economist with the consultancy Global Insight. "It takes more than words to change the growth pattern to a more consumption-driven one. It's a longstanding problem in the economic structure and requires long-term policies," she said.
"China has long promoted an external-oriented economy. The current weakening exports due to the financial turmoil should serve as a wake-up call." Stepping up investment spending would be the most direct way to boost growth, and data published yesterday suggest the government has already started down that road. Urban fixed asset investments were up 27.6 per cent in the first three quarters, according to the statistics bureau. The figure, which is a key measure for government spending on infrastructure and factories, hit 29 per cent growth last month alone.
However, state-employed economists have already warned against over-applying the pump-priming tool, wary of creating bubbles and useless overcapacity. "Investment could easily overheat and should be carefully kept at a rational pace," said Zhang Liqun, a researcher with the Development and Research Centre, a government think tank. Indeed, the government has spent the better part of this decade seeking to rein in local governments building new housing and manufacturing projects, regardless of whether there was demand. That leaves private consumer spending, which grew by 22.0 per cent in the first nine months of this year, a figure somewhat swollen by high inflation.
It is a more difficult tool to employ, as hundreds of millions of Chinese still simply do not have much money, those with cash preferring to save than spend and almost everyone reluctant to borrow. "Chinese, unlike many people in the United States, do not consume with borrowed money, so they are not very sensitive to measures such as interest rate cuts," said Wang Qing, a Hong Kong-based economist with Morgan Stanley. "Changes in monetary policy and other measures do not have much direct effect in terms of encouraging people to consume."
The Chinese could be spending more if it were not for their concern about the future, which forces many to save large amounts of their income in the banks. "They face major long-term spending on items such as social insurance, housing, health care and education, causing weak everyday expenditure," said Mr Wang. * AFP