To lift economy, China urges citizens to spend more

Beijing hopes stoking domestic consumption can boost its slowing economy. But convincing a nation of savers to spend more during hard times may be a tough sell.

Li Wen, the manager of a Citroen auto dealership in south Beijing, is pretty proud of himself. As car sales across China dive, torpedoed by the international crisis, his figures are holding up.

He is the sort of model entrepreneur whose example the Chinese government badly wants others to follow, as the authorities pin their hopes of staving off an economic slump on a boost to local consumption.

"Stimulating domestic demand is the most important factor to cope with the global financial crisis," the governor of China's central bank, Zhou Xiaochuan, said recently. "We need to adopt more comprehensive policies to support ... consumers' spending patterns."

One of Mr. Li's own policies – to offer more financing to car buyers – illustrates just how hard it could be to persuade a nation of savers to spend their country's way out of trouble.

Almost all of Li's customers – traditionally wary of falling into debt – pay cash on the nail, in full, for their autos. This year, he hopes to persuade 20 percent of them to take out loans that he has arranged with local banks. "We have to encourage consumers to buy," he says. "We dealers have to provide services to boost consumer confidence."

Counting on domestic demand

With export growth shrinking and industrial output falling precipitously in recent months, the government is hoping that domestic demand will keep the economic growth rate – an extraordinary 11.9 percent in 2007 – from falling below 8 percent this year.

That is the level, government economists say, at which the Chinese economy creates enough jobs to absorb a growing workforce. Beijing fears politically risky social unrest if the jobless rate climbs too high.

Last November, the government announced a record $586 billion economic stimulus package; much of the money is to be spent on the construction of infrastructure projects such as roads, bridges, housing blocks, and power plants, which will boost demand in key industries such as steel and cement.

That will also create jobs paying wages that can be spent, and the authorities have taken other steps to encourage consumption. Pensions have been increased, real estate sales taxes have been reduced, and rural residents can now claim a 13 percent government-subsidized discount when they buy consumer durables such as refrigerators, mobile phones, and TV sets.

It is too early to gauge the impact of such measures, and "the government can not do a whole lot" to encourage individual consumption, warns Arthur Kroeber, head of the "Dragonomics" economic consultancy in Beijing.

"People's ability to consume depends on their wages," which have been rising by about 10 percent a year in real terms, Mr. Kroeber says. The economic slowdown is bound to slow that pace, he points out, as people lose their jobs (more than 8 million people were sacked last year, according to official figures) and the pressure for wage increases eases.

A nation of savers

It is also uncertain how much consumers will spend in a time of uncertainty even if they do make more money. Bank deposits rose by 21 percent in October, suggesting citizens felt more comfortable saving than spending any extra cash they made.

"The reason for the slowdown [in sales growth] is not a lack of purchasing power but a lack of consumer confidence," says Xu Zhengfei, marketing director for the Suning chain of appliance stores.

Like Mr. Li, the auto dealer, Mr. Xu says his firm will promote installment plans this year "as a way to boost demand and cope with the financial crisis."

The average Chinese family saves some 30 percent of its income, partly because China's social security net is weak; people have to rely on their own resources to pay for a hospital stay, for example, or for a child's education.

Since the Chinese stock market slumped, the real estate bubble burst, and the papers filled with gloomy international economic news, "people are saving because they don't feel secure about the future," says Li Fei, associate director of the Retail Research Center at Tsinghua University in Beijing. "Their confidence in the short term is down, and they are being thrifty."

"Spending is essentially a confidence issue," Kroeber agrees.

With its control over the media and experience with "economic propaganda," he says, the Chinese government is "reasonably good ... at managing expectations and ensuring a base level of confidence" among consumers, and is now paying special attention to such efforts.

Long road to a new growth model

Shoring up consumption, however, will at best cushion the unprecedented blow that the Chinese economy has taken from the international crisis, Kroeber cautions.

Even if consumption continues to grow by some 10 percent a year, as it has been doing recently, "that won't make up for the loss of growth in exports and investment," which are expected to be severe, he says.

Nor will it do much in the short term to reorient China's economic development model away from reliance on exports and investment in fixed assets toward the greater dependence on consumption that economies in Europe and North America display.

"That will take five or 10 years," says Kroeber, "and it will depend on improvements in the social services. Only then will people feel that as their incomes rise they can spend that income instead of save it."