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How to get China spending: It’s Hard.

WSJ's article today (see below) echoes my earlier post on the difficulty to get Chinese consumers spending, especially during global recession.  In short, changing consumer's behavior in the short term is inherently difficult, if not impossible.  It can't be done overnight — just consider the unaffordable healthcare cost in China and its lack of social security system in the rural area.

China's Need for Self-Reliance

China needs its consumers to spend. Actually getting that to happen, though, is another story.

The country's long export and investment-led boom has stalled. Fourth-quarter growth in gross domestic product slid to 6.8% on-year, well below habitual double-digit levels.

Beijing's response, so far, has been on beefing up the government's role as consumer, notably through a nearly $600 billion fiscal stimulus plan. Part of its aim is to create jobs to replace those lost in the country's factories.

But that alone won't incentivize Chinese consumers to spend more, and offset a decline in spending on China's exports by recession struck Americans and Europeans.

With Chinese households holding a collective $3.3 trillion in savings, but debt of only $835 billion, China has the opposite problem to the U.S. — an excess of savings instead of too much debt. Household consumption as a percentage of GDP remains well below that in developed countries and many of China's Asian neighbors.

China's statistics bureau chief Thursday suggested households are starting to eat into those savings to support consumption. But other signs suggest otherwise.

Retail sales growth rates have slipped for six consecutive months now. That figure — unadjusted for inflation — isn't widely trusted, but slowing sales of cars and air travel, as well as anecdotal evidence of empty shopping malls, also suggest the trend is downward.

Near-term, consumer confidence is being hit by fear of job losses and pay cuts. The possibility of deflation soon could harm spending also.

Longer term, China's citizens have good reason to hang on to their spare cash, given the lack of an adequate welfare and pension system.

Belatedly, Beijing is responding. A recent cut in the car sales tax, and a three-year plan to spend $124 billion on revamping health care are steps in the right direction. Rural dwellers are being given financial help to buy more household appliances.

Interest rates offered on bank deposits are coming down as well, though this has had little effect in the past. Consumers continued to save diligently even with interest rates below inflation rates in 2007.

So, Beijing will have to do more. A cut in income taxes may not have much effect — many Chinese are exempt already, while others find ways to dodge payments. Instead, China might benefit from following other Asian countries by offering shopping vouchers, particularly to urban residents.

Whatever the answer, the question is becoming more urgent, if China's growth is to get back on the 8%-plus track so important to its leaders.

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