The slowdown in China’s economic growth last year has fostered mixed reactions. Some argue the recently-released 9.2 per cent annual rate exceeds expectations and is consistent with a soft landing. Others see the fall from 10.4 per cent in 2010 as an indication that a sharper drop is still to come.
Without actions to support growth, the pace may fall below eight per cent in 2012. Beijing is likely to lower taxes and consider special incentives to spur consumption. But the real challenge is to encourage less frugality among the Chinese, especially among migrant workers. Policies must be designed to deal directly with the exceptionally high rates of saving by people and corporations. This would have big implications for the trade balance, a contentious issue with the west.
Providing migrants with more security and encouraging higher corporate dividends could increase consumption by some five percentage points of national output. This could turn China’s current trade surplus into a deficit. These distinct and politically sensitive reforms would also lessen China’s alarmingly high income disparities. This strategy, with benefits for all, contrasts with that of pressuring China to strengthen the renminbi, perceived by Beijing as benefiting the US at China’s expense. Continue reading »