Pumping up power of consumption

Top economist sounds alert on overspending, report Andrew Moody and Lyu Chang in Beijing.

Does China need to consume more?

Despite the Chinese being famous across the world for snapping up luxury goods, household consumption as a share of GDP was 37.7 percent in 2011, according to the latest World Bank figures.

That is far below the 65 to 75 percent in European countries and the United States.

Transforming the economic model, from one driven by exports to one where domestic consumption is key, is a central aim of the 12th Five-Year Plan (2011-15).

Premier Li Keqiang declared this a central goal at a forum in Beijing in March. "China will expand its opening-up policy and the nation needs to promote domestic consumption by continuing to open up its markets," he said.

There have been fears that relying on investment - particularly after the 2008 global financial crisis and the government's 4 trillion yuan ($670 billion) stimulus package - could lead to a future investment bust, as happened in Japan two decades ago.

Therefore, it came as a surprise when one of China's most prominent and respected economists, Justin Yifu Lin, former chief economist at the World Bank, warned recently that China risked potential disaster if it makes a dash for consumption.

"Those who advocate that China's economy should rely on consumption are, in fact, pushing the country into a crisis. I've never seen any country fall into a crisis because of over-investment," he said.

Renewed debate

Lin's remarks prompted renewed debate about China's economic model and whether it is too reliant on fixed-asset investment and exports, so China Daily spoke to eight prominent economists and experts on China to discover if the preoccupation with driving up consumption levels has been overplayed.

Donna H. J. Kwok, Greater China economist for HSBC in Hong Kong, said the risks are far greater if China retains its current model without adopting measures to encourage consumption.

"The risks posed to China's long-term economic health if no measures are adopted to push the country toward a more consumption-driven model far outweigh those posed by the actual adoption of such measures.

"Relative to China's own history and other developed and developing countries across the world, China's private consumption-to-GDP ratio today is low. As such, China needs to, and in fact already has, started to adopt policies to reflate consumption as a key driver of economic growth."

Jian Chang, China economist and a director of Barclays in Hong Kong, said Lin's position is very much a minority view.

"I think the direction he is pointing to is somewhat against where we would like to see China develop and that is to a more market-orientated economy, one less led and directed by the central government.

"The current consumption level in China is lower than in any other developed economy or developing economies at a similar level of living standards."

Louis Kuijs, China economist at Royal Bank of Scotland in Hong Kong, who was a senior economist at the World Bank during Lin's period as chief economist, also said China has to change its growth model.

"I used to have these discussions at the World Bank. China cannot continue to increase its investment-to-GDP ratio. It is just not possible economically.

"I have sympathy with the argument also that it doesn't make sense to hand out credit cards to try to stimulate consumption, but China definitely needs a better-balanced pattern of growth."

However, Lin, who argues that sustainable consumption can only come from investment in upskilling the economy so workers have higher wages to spend, has his defenders.