WaPo: Why Chinese consumers need to be an integral part of the global recovery

In Search of Buyers. WaPo Editorial
Why Chinese consumers need to be an integral part of the global recovery
WaPo, Thursday, May 28, 2009

CHINA LENT it, the United States spent it, is a boiled-down description of the economic relationship between the two countries over the past decade. U.S. consumers gobbled up inexpensive Chinese goods (as well as those from other countries), fueling high levels of global growth. The Chinese amassed huge savings, which were in large part used to fund U.S. borrowing. That's not exactly a virtuous cycle, but it's one that became hard to break -- and for the most part, no one really wanted to.

However, it is highly unlikely that U.S. consumers will spend us out of this downturn. Research from the Federal Reserve Bank of San Francisco suggests that U.S. household leverage, which increased from 65 percent in the mid-1980s to 130 percent today, will come down significantly from such stratospheric levels, dampening U.S. consumption growth for quite some time. This deleveraging is in order -- such high debt rates are clearly unsustainable -- but it could also jeopardize what is likely to be a shaky recovery if there is no clear alternative purchaser of the world's goods. Though the United States and other governments are doing their parts through massive coordinated stimulus policies, that will not serve as a permanent solution. As last week's warning from Standard & Poor's about a possible downgrade of Great Britain's AAA bond rating made clear, countries with deficits will have to turn their attention from borrowing to closing their budget gaps once the recovery takes hold.

With its high saving rates and massive population, China has naturally attracted attention as a potential driver of consumption growth. Chinese families haven't been big spenders in the past (the country's spending has been more focused on government investment), due to cultural norms and low incomes. One of the largest factors is a lack of safety net and insurance programs, which forces families to set aside much of their incomes as precautionary savings. Measures to broaden the Chinese middle class and provide some basic economic security could free up immense amounts of cash that could be used to help get the global economy back on its feet. Indeed, the Chinese government has recently introduced new health-care and pension benefits, which should contribute a good deal to Chinese families' spending.

Pressures to speed up the process or to move it in a certain direction are unlikely to be greeted warmly by China. For years, the International Monetary Fund has been urging it to take measures to increase household incomes and the flexibility of its currency. The Chinese respond that they would like to take a bigger role in governing the IMF, not just take guidance from it. Treasury Secretary Timothy F. Geithner will have to approach the topic delicately during his trip to China next week.