Spend, Spend, Spend

By Li Hong (chinadaily.com.cn)
Updated: 2008-11-21 14:27

Deng Xiaoping, the most venerable man in China's 5,000-year history, had drawn the line for us: Development overrides anything. And, I deeply believe, he didn't expect his offspring to renege on the teaching at all.

Now, as the worldwide economic crisis in the United States is taking relentless tolls on all fronts, China's policy makers seem to be prompt with a rescue package. Beijing got many kudos when it was among the first nations to come out with a massive US$586 billion economic stimulus plan from 2008 to 2010.

However, faced with a sudden tumble of export shipments to all countries, which are being clobbered by the financial tsunami, China is slow to mete out timely policy alternatives to block the cooling domestic consumption from worsening. As all economists know, a big dip in domestic consumption, which accounts for 47 percent of the country's GDP, will have very negative effect on development. America has stepped into recession because consumers have shut close their wallets.

I will argue that, at the current stage of this serious predicament, rigorous spending by the government and consumers is the only way to spare China of a crash landing.

But, to date, we haven't felt heartened by any effective government measures to strengthen our buying power. Our anticipation for policy revisions haven't materialized. We haven't received any substantive tax cuts, and we hesitate every time to drive our cars to the pumps, because the government-controlled gasoline prices stubbornly refuse to change, although the world market prices have come down to less than US$50 a barrel Thursday from more than US$130 in the summertime.

Our prolonged hope that the government would give us more tax breaks, such as raising the personal income tax threshold of 2,000 yuan to 3,000 yuan a month, is still kept in the dark. Economists advocating that the government invest heavily on urban affordable housing, and sell it at a lower price than the profiteering private property developers has failed to get the ears of the policy makers. The most ridiculous issue is that Chinese drivers now pay gas bills at a rate 30-40 percent higher than our American counterparts.

In the face of rising competition in the job market, and a subsequent withering hope of pay hikes, we are required to be frugal as a way to buttress the unknown future. The government, at this critical time of economic downturn, is expected to give out aid to the average Joes, in order to jumpstart consumption, while not touching the bulging pockets of corporations, be it real estate tycoons or oil companies like Sinopec and PetroChina.

Without spending, all the world's markets will founder, leading to rising unemployment and worsening economies. China's isn't excluded.

If China's housing and auto markets go in the way of their Western counterparts, and the Chinese middle class have less and less money to spend, the scenario surely doesn't bode well for China. Also, other countries' hopes of a rapidly developing China to help alleviate the impact of a global recession will evaporate.

And, spending -- only powerful spending -- could avoid deflation from popping up in China and crippling the economy.

Deflation, defined as "a general decline of prices", has now raised its ugly head in China. Without spending, the prices of all commodities, from food, clothing, transportion to raw materials, will continue to drop. While most consumers might welcome the idea that things are getting cheaper, deflation is an economist's nightmare.

Deflation was a hallmark of the American Great Depression in 1929-32, and Japan's "lost decade" in the 1990s. The headache is that deflation will blunt the impact of interest rate reductions now taken by the central banks to revive the economy.

In all, spending is the only way out for China, and for the world. Any policies that run against spending will worsen an already sagging economy, and must be abolished now.