Investment Contrarians

What China Needs to Do to Pump up its Economy

By for Investment Contrarians |

What China Needs to Do to Pump up its EconomyChina continues to show evidence of economic slowing with stalled consumer spending, lower imports, and stagnant exports in August. Industrial Production is also weak and suggests weak foreign demand and domestic consumer spending.

At the heart of China’s slowing is the spending crunch involving Europe and the U.S., which is impacting the Chinese economy and threatening a possible “hard landing.”

The superlative growth of China’s GDP growth over the last decade has largely been fueled by export demand for cheaper Chinese-made goods. The country built thousands of manufacturing plants and added significant capacity to handle the substantial influx of foreign business.

While this strategy works when global economies are strong, the problem arises when export demand declines, as we are seeing now in China. There are many plants operating well below capacity, and it could get worse if the financial crisis in Europe doesn’t improve soon. For instance, the country’s aluminum-producing plants are cutting production. We are seeing the same in other sectors across China as the country’s economy slows.

To drive the economy, we are seeing hundreds of millions in new government spending. Most recently, China announced 30 new infrastructure projects worth about $157 billion.

But while fiscal spending will help, the responsibility for China’s success will fall squarely on the shoulders of its consumer spending. The current structure of the country’s growth is largely dependent on foreign demand for goods, but China realizes that it also needs to drive consumer spending higher in order to help minimize the negative impact of any global slowing moving forward and create a more balanced economy powered by both export demand and higher consumer spending.

The International Monetary Fund (IMF) recently suggested that China’s economy is facing “significant downside risks” and advised the country to try to increase domestic consumer spending instead of merely pumping money into the economy.

If you go to China, you’ll notice tens of thousands of empty apartments that were built by the government, but that were unable to attract tenants.

You also see this with excess manufacturing capacity. China has spent hundreds of billions on infrastructure, but having consumers increase their spending is key.

China has made it clear that it wants to stimulate domestic consumer spending, which currently stands at around a third of its GDP, compared to around 70% in the U.S.

With over 1.3 billion people and a middle class in excess of 300 million people who have newfound money to spend, the strategy to boost consumer spending makes sense.

In its 12th Five-Year Plan for 2011 to 2015, the Chinese government indicated that it wants to make the country less dependent on export demand and investment-led growth and promote equal income distribution that would allow its lower income citizens greater access to money. This in turn would pump up domestic consumer spending.

China has made clear its intentions to boost the Chinese economy with stimulus and make consumers want to spend.

The hope is to make it irresistibly attractive for the Chinese consumer to want to borrow and spend—a great American pastime!

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