Friday, February 13, 2009

Chinese Spending…or Lack Thereof

The World Bank’s Quarterly Report, published last Tuesday called for China to boost its domestic demand. This is not the first time the World Bank has urged the Chinese government to encourage its people to consume. The World Bank has made the same recommendation in just about every other quarterly report on China. And yet, this time, it’s a bit more striking because it begs the question, what more can China do?
First, let’s go to the 800 pound gorilla in the room. There’s been an economic crisis that has rocked the world since Sept. 15, 2008. For the first time, China’s government is not the only government that must urge its people to spend money and consume products, especially at a time when unemployment has risen, 67,000 small businesses in China fell into bankruptcy, and economic growth has slowed.
Second, the Chinese government just launched a Rmb4,000bn ($586 billion) stimulus plan aimed at upgrading infrastructure, expanding social welfare, and reforming rural land. About $123 billion of the $586 billion will be spent on a universal health insurance for the next three years. Some experts say a universal health care plan will create the foundation of a broad Chinese middle class who will have more of an appetite for world goods. However, it will take time for the wealth to accumulate.
Third, the Chinese government wants people to consume. It just wants to make sure that exports continue at a higher rate than imports. Unfortunately for the Chinese, export growth is shrinking. The only way for China to keep up the extraordinary economic growth rate it has enjoyed is to increase domestic demand. The Chinese government understands this and has put in much effort to restore consumer confidence to this country of savers through, let’s face it, economic propaganda.
I took the opportunity to look at quarterly reports of other countries to see if those countries were admonished the same way or to see what other countries do to deter the recommendation. What I found was pretty surprising. . . or not. Mongolia (it’s the only other quarterly report that came out in Feb. 2009 which discusses domestic demand) was praised for their domestic demand. The reason? Mongolia’s imports are greater than their exports. Therefore, one desired equation is imports > exports = good domestic demand.
China’s solution if they want to satisfy the World Bank (and the rest of the world): start importing more than they export. Not to state the obvious, or actually, to state the obvious, I do not see the Chinese government being so thrilled about the strategy.