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• JANUARY 7, 2010

China Aims to Transform a Nation of Savers Into Spenders

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By ANDREW BATSON

BEIJING -- China's forceful use of government stimulus programs helped it emerge from the financial crisis as the world's fastest-growing major economy. Yet with the worst of the crisis past, the government is putting more resources into subsidies to support consumer spending.

That short-term focus on boosting purchases of automobiles and home appliances, critics say, does little to address the longer-term challenge: weaning China's economy off exports and finding new sources of growth in domestic consumption.

Bloomberg News

Shoppers browse Wednesday at a Beijing outpost of the Suning Appliance Co. chain. Government subsidies have helped increase sales of appliances.

"Subsidies just shift consumption in the future to consumption in the present. All of these small policies will not solve the big problem," said Wang Jian, secretary-general of the China Society of Macroeconomics, a government think tank. "The key problem is how to open up domestic consumption now that external demand is declining."

Spending by China's increasingly prosperous consumers is now one of the most closely watched trends in the global economy, as it could help offset cutbacks by U.S. households. China's official policy since 2004 has been to get more economic growth from household consumption. But that goal hasn't been met: consumer spending's share in the economy has fallen from 40% to 35% over the period.

Many Chinese economists say reversing that requires politically difficult policies that would favor consumers more and state enterprises less. For instance, lifting restrictions on small and private businesses would likely help create more jobs, giving households more money to spend. But the government has often moved in the opposite direction: For instance, it bailed out state-backed airlines while letting their private competitors fail.

China also has rebuffed calls to let its currency rise, a move that could hurt exporters but that trading partners say would boost the purchasing power of Chinese consumers. Premier Wen Jiabao last month said China "will absolutely not respond" to pressure to let the yuan appreciate, and noted that exports remain relatively weak.

The government is spending substantial sums to get consumers to buy manufactured goods. China budgeted three times as much as the U.S. on subsidies for car purchases in 2009, notes Thilo Hanemann, an analyst for Rhodium Group.

The U.S. set aside $3 billion for its "cash-for-clunkers" program and $1.7 billion for a tax deduction on car purchases, but China planned $14.8 billion on tax breaks and subsidies for car purchases. The response has been dramatic: Sales of cars eligible for the break are up 63% this year as of the end of October. And a trade-in program to subsidize home-appliance purchases has had $1.3 billion in sales by the end of November.

Consumers like the programs, but are becoming more demanding. Zhang Jun, a 45-year-old accountant in Beijing, said government programs helped persuade her to buy a new washing machine. Ms. Zhang said she is considering buying a new television set this year, but would like to see even more incentives. "The subsidy is too low. I think the current stimulus effort is not big enough," she said.

The government said last month the tax break on cars with smaller engines would be extended into 2010, though at a reduced rate, along with a host of other consumer subsidies. A "cash for clunkers" trade-in program will offer higher rebates next year. Subsidies for purchases of home appliances will be extended through this year.

Yet household savings remain high at over a quarter of income, which constrains how much faster consumer spending can grow. The subsidies probably won't deliver as big of a boost going forward, since many consumers have already taken advantage of them.

While other countries have also used such subsidies, few governments have extended them for as long as China's has. "It suggests that they're not that confident that consumption will remain strong without these subsidies in force," said Mark Williams of Capital Economics in London.

Write to Andrew Batson at andrew.batson@wsj.com