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North American Report
UPDATED: November 16, 2009 NO. 46 NOVEMBER 19, 2009
China's Consumption—A U.S. View
Derek Scissors, a research fellow for Asia Economic Policy at The Heritage Foundation's Asian Studies Center, discussed consumption in China
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In spite of the Chinese Government's constant efforts to promote consumption, Westerners contend more needs to be done on the consumption front. In an interview with Beijing Review, Derek Scissors, a research fellow for Asia Economic Policy at The Heritage Foundation's Asian Studies Center, discussed consumption in China.

Beijing Review: The Chinese savings rate has risen considerably in the past few years while the increase of its consumption has been much slower. What, in your opinion, are the main reasons for the slow pace?

(COURTESY OF DEREK SCISSORS)

Derek Scissors: There are multiple reasons; most important of which is competition repression. State-owned enterprises and shareholding firms blessed by the government are granted free land, costless capital and powerful regulatory protection. When competition has emerged, the National Development and Reform Commission (NDRC) and its predecessors have labeled it "disorderly." They then initiate consolidation programs. Lack of competition enables these firms to register large accounting profits and also forces consumers to pay higher prices than would otherwise be necessary, reducing consumer demand.

The second reason is financial repression. For the sake of maintaining the solvency of banks, which are forced to lend for policy reasons, deposit rates are kept far too low. This robs consumers of income directly, again reducing their consumption.

This is connected to the third reason—weakness in unemployment compensation, health care and pensions. Personal savings must be high and consumption low, because the lifetime income path is so uncertain—how long after retirement will I live and with what pension? If I suffer a major injury or illness, what health insurance will I have?

China has created a system that encourages high savings but also makes both personal saving and consumption difficult. In this setting, individuals save because they have to but they are pushed to save more than should be necessary and consume less than desired.

How would you comment on China's recent efforts to boost its domestic consumption? What additional measures need to be taken?

China has succeeded in maintaining a fairly strong economy in a difficult economic time. Though some job losses and salary cuts have occurred, most Chinese people have fared better in the crisis than most around the world.

However, success may be temporary. China has not adjusted its economic structure at all and is creating conditions for another economic slump at home and perhaps internationally. While the main measure of consumption did quite well in the first three quarters of 2009, its growth is still only half as quick as that for the main measure for investment. And investment is much larger. The share of investment in the GDP will increase yet again. It is true that the share of consumption in the GDP may also increase because the trade surplus has shrunk, but that is due to an adjustment "outside" China, in weak foreign demand. In terms of what China can control, the imbalances are worsening.

What should be done is the promotion of competition, especially among banks: less support of firms by banks, more competition by banks over customers, and lower prices for consumers.

Chinese tourists have been known to be generous shoppers in foreign tourist destinations. What is your observation of the contrary behaviors of Chinese consumers domestically?

China has become much wealthier over time, so the first change in the behavior of Chinese consumers is they have much more money than their parents. As much as possible must be saved from the first 10,000 yuan ($1,464) of income, the second 10,000 yuan ($1,464) of income permits more spending, and so on. Of course, those able to shop in foreign tourist destinations are much richer than the average person.

Another factor is awareness of the outside world, through greater travel, television, and the Internet. This is another outstanding development but, again, it applies more to higher-income individuals and families.

Do you favor the argument that the Chinese consumers are going to lead the world out of the recession? What kind of role are Chinese consumers expected to play in the world economy?

It is absurd to claim that Chinese consumers are going to lead the world out of recession. To increase global GDP growth directly, a country must run a trade deficit. China's trade surplus is shrinking but it is still the largest in the world. China is thus detracting from global GDP growth in the short term. In particular, imports fell 20 percent in the first three quarters. The rate of decline is slowing but it is still considerable. Chinese consumers have contributed to strength at home; the statistics say clearly that they have not contributed "at all" to global stabilization and recovery.

Until the Chinese Government is ready to move from an investment-led to a consumption-led strategy, Chinese consumers cannot play a positive role in the world economy.

Does China also need to pay attention to the issue of over-consumption, which is a problem among U.S. consumers?

It certainly is wise not to follow the American example of the past seven years. However, the American example of 1982-2002 might be a good one for China to examine.

More important, China is far, far away from an over-consumption problem. Worrying about over-consumption at this point would be like Yao Ming worrying that he will shrink when he is old.

(Reporting from New York)



 
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