Fri, Jul 10, 2009 - Page 8 News List

China can’t save global economy

By Sushil Seth

The present infrastructure spending, as part of a nearly US$600 billion stimulus package, will help but it is not going to fix China’s problems. Therefore, it needs to stimulate its domestic consumer spending.

It has successfully managed to depress or contain economic demand at home to produce exportable goods at cheaper prices with a skewed exchange rate. That option is now constrained because of the deep global debt crisis.

Therefore, it has to stimulate its domestic consumer economy. But there are two problems here.

First, China, both at the government and private level, puts great store by a high savings rate of about 30 percent. From the government’s viewpoint, a high rate of saving with low interest rates for its savers, contributes to China’s low cost economy.

And with high private savings as a cushion against adversity, China has been able to manage with the minimum spending on social services and the health of its people.

This must change. China needs to modernize its social spending to take greater care of its people’s education, health, old age and related services. This is long overdue.

The expansion of the social services sector will create domestic demand for a whole range of jobs and goods with a multiplier effect on the economy.

More than anything else, China badly needs to revive and upgrade its rural sector. It can no longer afford to use its depressed rural economy to subside the urban industrial sector.

If it wants to create a broadbased and sustained domestic economy, it needs to put more resources into the rural economy.

This is necessary not only to bridge the urban-rural gap, but also to expand the domestic economy through increased consumer demand beyond the urban middle class of about 300 million people.

It is important to note that 800 million or more of China’s rural folk have been largely left out of China’s industrial economy.

An expanded domestic economy will also create demand for foreign goods once China undertakes to revalue its currency to better reflect the international exchange mechanism.

There is a need for China to shed its hoarding mentality of building up currency reserves, and large domestic savings for some sort of rainy day. It is no longer vulnerable to the foreign manipulation and occupation of the 19th century.

A reinvigorated Chinese economy with a strong domestic base can play a useful role internationally.

But with its historical baggage of a “century of humiliation” and a Leninist political system, it might not be able to deliver.

Sushil Seth is a writer based in Australia.

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