China’s efforts to move away from an economic structure where economic growth was driven by high investment and export demand in favour of domestic consumption-led growth may come up against hurdles in days to come. China’s strategy to boost domestic consumption had three major components: increasing the size and scope of credit markets, abolishing agricultural taxes and allowing a gradual appreciation of the renminbi. Of the three, the expansion of credit markets was scaled down considerably after fears that it was leading to the creation of asset bubbles, particularly in the housing market. The agricultural tax rebate has had little impact, because returns from the land are rapidly diminishing, leading to large-scale migration to urban areas, despite China’s oppressive hukou (residential permit system). While the renminbi has appreciated almost 15 per cent against the dollar, the rise is not large enough in itself to significantly alter China’s balance of trade. Additionally, given that almost half of China’s foreign exchange reserves are dollar denominated ($1.6 trillion out of a total of $3.2 trillion), a sudden rise in the renminbi relative to the dollar will send the dollar’s value crashing, creating a global crisis that nobody wants. China’s consumption-to-gross domestic product ratio, thus, remains at 40 per cent (the corresponding ratio for India and the United States is over 60 per cent).
What are the odds that China will step up to the plate and be the “consumer of last resort”? Low, if the present evidence is anything to go by. With inflation raging at 6.5 per cent, boosting consumption is the last thing on the minds of the Chinese authorities. China’s ability to play saviour, as it did in 2008, by boosting global liquidity is restricted. China needs to grow at over nine per cent to generate the kind of employment needed to preserve social stability. To do so, it is likely that it will fall back on the tried and tested technique of boosting investment spending, given that growth in its dominant export markets of North America and the Eurozone is expected to be muted.
Can China’s investment be a trigger for growth for the global economy? Again, the scope is limited except in certain select raw materials. As part of an indigenisation strategy underway for almost a decade, China has opted to domestically manufacture several intermediate products that it imported from south-east Asia. As a result, China has sharply lowered its trade deficits with the region, which compensates for a decline in exports particularly to the United States, to which export growth rates have dropped by 20 percentage points over the last year! Expect China’s economic policy stance to be increasingly defensive in nature in the foreseeable future. It would mean a deceleration in China’s own agenda to rebalance its economy by increasing the share of consumption. The global economy, on the other hand, would have to look for another prime pump!
