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China needs to diversify economic growth model

(peopledaily.com)
Updated: 2006-11-23 17:16

China had made striking progress in the last 27 years, but while its development model remains focused on fixed investment and export, it will be difficult for the country to go develop further, said Stephen Roach, Morgan Stanley's chief economist in a speech at CEIBS Executive Forum.

Mr. Roach recommended that in the next three to five years, the transformation in China would be to move out of exports and investment, and much more into the neglected sector-private consumption. That does not mean the exports and investment won't grow, for China still needs investment for urbanization and industrialization, and exports to create job opportunities and boost output. However, what China needs the most is a more balanced and diversified economic growth model.

China is probing into the necessity of rebalancing economic development, said Mr. Roach. A key issue is the gap between the country's urban and rural areas. Farmers need to earn a higher income and consume more, which is not presently possible. Narrowing the gap will be difficult and it will take time, and it is likely that the consumption capacity of people in urban and rural areas will never be absolutely identical.

Mr Roach referred to a survey that shows that Chinese households have become increasingly dissatisfied with the level of saving since 1997. One might think it unusual because it is well know that Chinese families have the highest savings rate in the world. But according to the survey, they are not happy with it. The reason for this is economic insecurity, which has caused people to save as a precautionary measure. Chinese leaders have wisely made boosting domestic consumption and, in particular, establishing a national security plan a focus of their 11th Five Year Plan.

This by no means indicates that the Chinese consumers are about to emerge as the world's economic engine as their starting point is very low. The gap between the personal consumption of the US and that of China is too huge to be filled instantly. The two figures in 2005 were 9 trillion for the US and 1 trillion for China respectively. It means that for every one percentage point the American consumers weakens, the Chinese consumers will have to grow 9% point to make up the gap. That is not going to happen overnight.

Conversely in the US, something needs to be done to curb the extravagant spending of US consumers as their savings rate is the lowest in the world. Mr. Roach concluded that if American customers save more and Chinese customers save less, the world would be more economically stable.