A fine balance

Chang at Barclays says there is certainly no need for the Chinese government to "drop money from a helicopter" to boost consumption by such measures as tax cuts or creating the conditions for a credit boom.

"Maybe in a crisis period like a recession, you might need some emergency kind of tool but what China needs is some deepening of the so-called structural reforms. It also needs to focus on income distribution and improving the social safety net."

She believes that Chinese people will naturally consume more when they hit a higher average income level, particularly on service goods in such areas as recreation, tourism and cultural pursuits.

The Barclays economist also observes that younger people in China already show a higher propensity to consume than their parents and this trend will push China consumption levels up over time.

"When I take the high-speed rail from Shanghai to Beijing, you often see younger people in first class. The younger generation born in the 1980s and 1990s want the best things now."

Zhu at CEIBS argues it is important that China gets the balance right and has a consumption level appropriate to its stage of development avoiding the problems faced by other developing countries such as Brazil.

"Brazil has a consumption to GDP ratio of around 80 percent, similar to a European country, but the problem is that it is not sustainable, and they are becoming indebted."

He points out that Singapore proves that to have fast consumption growth a country does not have to have a high consumption to GDP ratio since it is around 50 percent.

Kuijs at Royal Bank of Scotland does not believe that Singapore is a good role model for China since it is a city-state not really comparable with the world's second-largest economy.

"Singapore is a bit like London in that it has a lot of foreign company headquarters and a big professional population that are very rich. It is not an example China can really follow."

Junheng Li, founder of J.L. Warren Capital, the New York-based equity analyst firm and author of the newly published Tiger Woman on Wall Street - Winning Strategy from Shanghai to New York, says it is not that China has to stop investing and start consuming but about achieving greater balance.

"Investment versus consumption-led growth should not be treated as a binary, all-or-nothing thing, but as a matter of proportion.

"At this moment, domestic consumption is certainly too low but there are issues too about the quality of investment. Much of it is wasted with too much directed to state-owned enterprises and not enough to the true private sector. The Chinese economy has become increasingly inefficient."

Michael Spence, former Nobel-prize winner and now professor of economics at the Leonard N. Stern School of Business at New York University, is one who believes Lin is wrong to downplay the importance of domestic consumption.

"The supply side shifts are important and necessary, but for China not sufficient. The demand and income side restructuring is also a key component," he says.

He agrees that there should not be major credit expansion to fuel consumption but higher domestic consumption is a fundamental part of the rebalancing of the economy.

"The demand side is also critical. Without it, the non-tradable sectors (such as professional services and other activities associated with a developed economy) will be slow to develop and that will get in the way of growth."

Kwok at HSBC, however, says the government has a major challenge on its hands to boost domestic consumption and that it will take time.

"It has already started to adopt policies to reflate consumption as a key driver of economic growth. That said, not only will the delivery of any meaningful result likely take at least another five to ten years - and need at least another five-year plan - but the process has to unfold gradually," she says.

"The criteria that have to be ticked along this process are not ones that can be completed overnight."

(China Daily European Weekly 05/31/2013 page1)