Encourage spending, not saving (2)

International practice shows that a country's savings rate is very high if it is more than 50 percent of GDP and household consumption is very low if its is below 35 percent of GDP under any given circumstance. China must realize that high savings will weaken its potential for stable growth. It should also realize that its efforts to maintain a stable and relatively rapid economic growth will not bear fruit if it fails to boost domestic consumption.

The export-oriented growth policy has helped China create a huge number of jobs and increased people's incomes. But its long-term dependence on exports has also increased its trade surplus and foreign reserves, which the West claims has triggered global imbalances and was even partly responsible for the global financial crisis.

To reduce its trade surplus, China has adopted some policies, such as lowering import tariffs, withdrawing tax rebates for some export products and taking steps for the gradual appreciation of the yuan. But China needs to make greater efforts to lower its savings rate and extricate itself from the investment- and export-driven growth model and develop itself into a consumption-led economy.

As investment and exports lose steam to drive China's economic growth further, the government's top priority is to boost domestic demand to maintain economic growth. An excessively high savings ratio and households' reluctance to spend will eventually lead to overproduction.

With the launch of a plan to double people's income by 2020 from the 2010 level, as unveiled by the report delivered by former Party chief Hu Jintao to the 18th National Congress of the Communist Party of China, people's incomes are expected to witness a considerable increase in the years to come. However, how to divert their increased incomes to consumption instead of savings accounts will remain a pressing task for decision-makers.

To motivate its people to spend more and lower its current high savings ratio, China should tilt the leverage of national wealth distribution to the people, especially middle- and low-income groups, a move that will help raise their consumption capability. It should also work out a series of practical and effective measures to improve its underdeveloped social security network to reduce people's sense of insecurity and boost their willingness to consume. It is hoped that the government will come up with a set of systematic plans in its upcoming program of income distribution reforms to solve this problem once and for all.

The author is a journalist with China Daily. E-mail: [email protected]

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