The next best thing

Boosting consumption seems to be a logical choice to counter an impending economic slowdown

Despite China's increasing tolerance for slower economic growth and determination to improve the quality of its economic growth in the coming decade, many still feel that China should maintain a GDP growth of no lower than 7 percent to facilitate future reforms.

The one aspect that most experts, however, differ on is whether China should shift its economic growth model from the current model reliant on exports to a new one that seeks growth from rising domestic consumption.

More and more people seem to agree that exports can no longer sustain China's economic growth in the coming years. The trade figures also seem to point in this direction. The highly debated export numbers, even if true, do not provide a bright future for the sector.

At the same time, a stark contrast looms in the financial sector. Even with the softening economic and neutral monetary policy, China's total financing amount increased by more than 100 percent during the first four months of the year, compared with the same period in 2012.

Such a contrast seems to suggest that the marginal rate of investment returns has been dropping considerably and that the traditional stimulus tools are becoming less effective, given the unprecedented huge amounts of liquidity that is being injected into the economy, since the 4 trillion yuan ($653 billion) stimulus package in 2009.

Further fiscal stimulus and monetary easing may not solve the economic slowdown problem, but will rather exacerbate the inflation and property and asset price problem that has already been challenging policymakers.

So what is the solution? If exports and infrastructure investment have both reached their limit in helping China's economic growth, maybe it is time for consumption to take up its share of responsibilities to boost China's economic growth to the next level.

But that job is much easier said than done. For starters, unlike government-led investment projects, governments do not have clear channels to alter consumer and household behavior and choices (barring some consumption subsidy programs which have indeed caused overcapacity in certain sectors).

As a result, the consumption-driven economic growth model will take much longer to prove its potential than the investment-driven economic growth model.

Second, to encourage consumption, the government has to deal with two equally challenging tasks: inequality in income distribution and fiscal and taxation reform. China's income inequality problem has become serious enough that many who desire to consume do not have the disposable income to do so, whereas those who have the disposable income (often much), already have all that they need and do not desire to consume more.

Distributing income and wealth more reasonably, probably through fiscal and taxation reform, is a key question that Chinese policymakers would have to face in the long run. With slowdown in the economic growth and a fast increase in government's fiscal budget, there seems to be less flexibility for the government to overhaul the fiscal and taxation system.

Of course, some are also concerned whether China can actually follow the Western pattern of growing the economy through domestic consumption. On the surface, such concerns seem valid, especially in light of the 2008 global financial crisis, which was partly fueled by Western consumers' spending beyond their means.

However, such concerns seem unnecessary, at least under the current economic circumstances.

First, with two other major economic engines (exports and investment) sputtering, consumption remains the difficult yet more feasible path for the Chinese economy to take.

Second, especially with consumption lagging in the past two decades, the potential to grow consumption is much bigger than the potential to continue to push for gains in investment or exports.

Third, household-based consumption will cause far less distortion in factor price and resource allocation than government-led investment projects.

Fourth, consumption will also pose a far less threat to the safety, environment and social stability than many real estate and infrastructure projects.

Finally, over-consumption may have to shoulder its share of responsibilities for the 2008 US financial crisis and the ensuing European sovereign debt crisis. However, that happens when the countries' per capita income is five to 10 times that of China's per capita income. So even if one should be concerned with consumption being the culprit for another financial crisis in China, one does not have to worry about it now.

The author is deputy director of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University.

(China Daily Africa Weekly 10/04/2013 page9)