If there is one economic tonic that’s prescribed over and over for China, it’s this: rebalance the economy.
In layman’s terms, that means China should rely less on investment in infrastructure and capital-intensive industries and more on domestic consumption. (Any journalist covering China’s economy has written that prior sentence enough times to make his or her wrists hurt.)
Why? Excessive investment has led to the construction of subways, bridges, airports and real estate projects that have no reason for being. The investment focus has also made the air over every major Chinese city foul with pollution. If people spent more and saved less, the theory goes, they would spend more on services and high-tech goods, which produce more employment and less pollution than, say, steel mills.
At least one major bank thinks the rebalancing theory is wrong.
“We believe the obsession with rebalancing China’s economy is leading to misguided policy recommendations that are too blunt and may carry unintended consequences,” including, perhaps, reducing savings, write HSBC economists Qu Hongbin and John Zhu in a new report.
Sure, China’s investment rate is ultra-high at around 48% of GDP, they acknowledge. Sure the household consumption rate is ultra-low at roughly 34%–about half the level of the U.S. ( Some economists think that China’s consumption rate is lower than U.S.’s ever was, in its entire history.)
But Messrs. Qu and Zhu argue that China is a poor country and investment is still necessary. “There are still more useful infrastructure projects to be built before the country gets overrun by bridges to nowhere,” they write.
And, they argue, who says a consumer-based economy is so great, especially one powered by debt? The U.S. hasn’t exactly been a beacon to the rest of the world in the last couple of years when it comes to the economy.
In some ways, though, HSBC’s analysis isn’t all that much different than those of the rebalancers. Messrs. Qu and Zhu argue that China has to invest more wisely so that it gets value from its investment – the same as those pushing more domestic spending.
But rebalancing will happen naturally as China’s population ages, they say. People all over the world save less when they reach old age because they aren’t earning much income and they still have plenty of expenses. For now, HSBC says, China should amp up its investment.
So, Chinese consumers, keep a lid on those credit card bills.
