China needs to encourage spending: Daily

Beijing, Nov 25 (IANS) The Chinese leadership should accord top priority to spending more of the government’s massive savings to facilitate its transformation to a consumption−driven economy, said a daily.

An Op−Ed article in China Daily Sunday said that top priority is to boost domestic demand to sustain economic growth while investment and exports are losing steam.

“As the Chinese leadership seeks to find a way to check the country’s economic downturn, it should take measures to spend more of the government’s massive savings to facilitate its promised transformation to a consumption−driven economy,” it said.

The article said that China’s aggregate household savings had surpassed 18 trillion yuan ($2.86 trillion) by the end of 2009, with per capita savings of 13,000 yuan.

It noted that along with households’ ever−rising savings ratio is their declining willingness to consume.

“Aside from the long tradition of Chinese households’ frugality, the absence of a well−developed social security network − including pensions, education, healthcare and government−subsidized housing −has motivated households to save more as their incomes have kept declining in the country’s economic aggregate,” said the article.

It added that savings is “not a curse in itself” and it is necessary for a developing country, which does not have sufficient investment funds in the early period of its economic and social development, “to maintain a certain level of domestic savings, because it can help it avoid borrowing excessively from other countries to fund its funds−thirsty development”.

It went on to say that at a time when investment and exports have a declining potential in the context of the global economic recession, “China faces the immediate task of bringing down its high domestic savings and diverting some of this huge amount to consumption”.

“This poses a long−term challenge for China in its bid to transform its investment− and export−driven development model into a consumption−led model.”

The article stressed that as investment and exports lose steam to drive China’s economic growth further, “the government’s top priority is to boost domestic demand to maintain economic growth”.

An excessively high savings ratio and households’ reluctance to spend will eventually lead to overproduction, it added.

“To motivate its people to spend more and lower its current high savings ratio, China should tilt the leverage of national wealth distribution to the people, especially middle− and low−income groups, a move that will help raise their consumption capability.

“It should also work out a series of practical and effective measures to improve its underdeveloped social security network to reduce people’s sense of insecurity and boost their willingness to consume,” said the article.

IANS 2012-11-25 12:30:05