Since China recently released its second quarter growth rate of 7.5 percent - which was within some economists' predictions - there has been a lot of discussion about "what's next" for the world's major economic engine, which used to generate double-digit growth.

But to those who are bullish about the world's second-largest economy - even with more slower growth in coming years - China can manage. Many argue that the slowdown is a good thing and provides China with needed time to regroup and rebalance its domestic economy so it can drive more domestic consumption.

But other experts say it will take quite some work for China to drive domestic consumption.

Dan Steinbock, research director at the India, China and America Institute, said the process is not as easy it appears.

"Most Western analysts would like to see the role of investment decline dramatically and the role of consumption increase dramatically in China," said Steinbock. "I am afraid that view is too simple and potentially very harmful to Chinese and global growth prospects."

Steinbock argues that investment-led growth is still vital for China's industrializing third- and fourth-tier cities, whereas services and consumption is already becoming more important in China's relatively more prosperous first- and second-tier megacities.

"So, while the shift from investment to consumption has already begun, it must be gradual and it will happen differently in different Chinese regions," said Steinbock. If this shift is forced to happen too fast and abruptly, Steinbock said, "China's less prosperous cities will not be able to complete their industrialization, while China's more advanced cities will not be able to develop services and expand their tax base to support their social model, which, in turn, is needed for consumption-led growth.

"In the past, China's growth was fueled by investment and net exports. Due to the slow recovery in the US, a potential lost decade in Europe, and two lost decades in Japan, the role of net exports in the Chinese GDP has been shrinking since the global recession in 2008 and 2009," said Steinbock.

"Simple logic shows that it is nearly impossible for China's GDP to grow at current rates while rebalancing away from its dangerous over-reliance on exports and debt-fuelled investment," Michael Pettis, a finance professor at Peking University and the author of The Great Rebalancing, recently wrote in the Financial Times.

Pettis argues that the low rate in consumption is mainly because of "policies that systematically transferred resources from the household sector to subsidize rapid growth".

"This forced down the household income share of GDP, which at about 50 percent, is among the lowest ever recorded in the world. There is no sustainable way to boost household consumption without boosting household income," said Pettis.

"If household income can grow annually at 6-to-7 per cent, income will double in 10 to 12 years, in line with the target proposed by Premier Li Keqiang in March during the National People's Congress," Pettis said.

Back in April, the Chinese government said it would boost domestic consumption as a driver of its economy during the slowdown, promising to guard against risks from rising local government debt, which caused concern about the country's finances. The government promised changes in medical, pension and other policies.

Lionel Vairon, a former French diplomat and author of a new book entitled China Threat? The Challenges, Myths, and Realities of China's Rise, doesn't agree.

"This is wishful thinking, the point is not there," said the author, adding that the Chinese government - as it has proved with many different challenges it has faced - is capable of adapting to new challenges.

To drive domestic consumption - regardless of what tier Chinese it's in - also means changing the habits of the Chinese who have long been known for saving their money.

"To spend money, you need trust in the government and social system," said Vairon, adding that has been something which has prevented the Chinese from spending more.

What the new government is doing by fighting corruption, said Vairon, is a good way to help get the Chinese to spend more of their money.

"That will have an impact on domestic consumption," said Vairon.

Contact the writer at yuweizhang@chinadailyusa.com

(China Daily USA 07/29/2013 page2)