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Thursday, March 30, 2006 

China Shifts to Consumer-Driven Growth

This week's Economist explains the risks associated with China's plans to shift to a predominantly consumption-driven economic growth, in an article titled Keep Growing. (Subscription required)
"But if China's growth is to be led by consumption rather than by investment and exports, as most analysts agree it needs to be in order to avoid boom-bust cycles and growing friction with trading partners, the country will need to get used to a lower saving rate. And the banks are still in poor shape. A large share of lending from the boom of 2001-04 could turn into bad debt. Although official figures for non-performing loans look encouraging, they mostly rely on the accounting trick of moving such loans into asset-management companies. China's property market, though sustained by strong demand for new urban housing, could turn into a bubble.

Boosting private consumption could be difficult in a country with a GDP per person of only $1,700, especially given the absence of a comprehensive social-security system. The government needs to boost its own consumption first. This means spending more on health care and education, and expanding the social-security network in rural as well as urban areas."

By the way, there isn't much new in the special survey on China that is published in this week's Economist.

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