People say that China needs to have GDP growth of over 6% a year to ensure enough job creation to prevent social and political unrest. I mean the high economic growth in China can legitimize almost everything that the CCP has done since reforms in 1978. Ending the Democracy Wall movement? Well, they countered that by opening up rural agriculture markets. Crushing the Tiananmen protests? The number of people lifted out of poverty since the reforms have saved and improved the lives of millions. The suppression of political and religious freedoms? China’s open economy has put a McDonalds on every block and brought the Olympics to Beijing.
Ok, so of course economic growth doesn’t legitimize everything, but all those people who hate on China usually avoid criticizing the CCP’s handling of the economy (except in the cases of high inequality and damage to the environment). So if ‘crisis’ really is hitting China’s economy, then something must be done.
As the demand for China’s exports shrinks, he said that as part of relaunching the economy, the country had to focus now on expanding domestic consumer demand.
Ah yes, increasing domestic consumer demand to make up for the huge drop in exports. But then again…
Mr Wen said that among the reasons behind the current global downturn were “inappropriate macro economic policies in some economies, characterised by [a] low savings rate and high consumption”.
So China is going to change the structure of their economy so that it can become the reason for the next global economic downturn instead of a victim of someone else problems? Ok, I’m kidding, but does China really need to increase their domestic consumption?
Increasing domestic consumption would mean all those goods waiting in warehouses would be sold and firms would receive higher revenue. This means that they would be able to hire more people and thus save the economy.
However, if savings are really high in China, firms can borrow money at a really low interest rate. Since there is currently lower consumption demand, firms should just focus on investing for the future so that they can produce better and more goods at a lower cost. Or at least that’s what all those classically trained economists would say.
If we were talking about America’s economy, I would say that we should encourage Americans to save more so that banks with bulging vaults would be forced to loan that money out to reputable and innovative companies. However, since China doesn’t have the best financial system in the world, a lot of those savings might be wasted on poor investment choices, like propping up a failing SOE. So yeah, I think Mr. Wen is right that increased domestic spending, may it be through coupons to buy a new fridge or discounted bicycles for rural folk, would do a lot of good in getting China through the current economic downturn.