Source: New York Times

China's Next Stage: Consumption vs. EmploymentEDITORS: China celebrates 60 years of Communist Party rule this week. But devotion to a socialist ideology seems to have been replaced by pride in rising standards of living and the ability to go shopping, at least in the glittering precincts of Shanghai and Beijing. The Chinese government is expanding subsidies for consumer spending on home appliances. Retail sales during the eight-day national holiday are expected to soar, and 560 million people are expected to travel in China during this holiday week.

Is China, 30 years after its opening to the West, becoming a consumer society? What policies might help in that transformation, and what are the consequences for other nations?

PETTIS: The Chinese are already eager consumers, eager to buy many of the same things that Western consumers buy — with an especial fondness for overpriced brand labels. Any visit to the throngs of wistful window-shoppers in Beijing’s Wanfujing or Shanghai’s Nanjinglu, the country’s premier shopping streets, will make this very obvious. So why are the Chinese consuming at what may well be the lowest rate as a share of G.D.P. ever recorded?

Consumption growth in any country is necessarily limited by the growth in household income and wealth, neither of which has grown nearly as rapidly in China as the country’s economy. China’s development model is a steroid-fueled version of the classic export-led model common to many high-saving Asian countries. This model involves systematically subsidizing production and investment, often leading to very inefficient investment.

Of course subsidies must be paid for, and in China households pay for them in the form of taxes and low wage growth, among other factors. Increasing the growth rate of the economy through investment subsidies paid for by households reduces the share of consumption in the overall economy.

Since the contraction of the U.S. trade deficit almost certainly means that in the medium term China’s growth will be limited by its domestic consumption growth, Beijing has embarked, almost desperately, on a number of policies to goose domestic consumption.

Will these policies work? Perhaps in very specific cases they will cause consumption to increase, but in general Chinese consumption is unlikely to accelerate unless the government reverses policies that forced households to subsidize inefficient producers. But reversing those policies would almost certainly cause unemployment to rise in the short term.

So Beijing is doing the opposite. To prevent rising unemployment caused by the collapse in exports, Beijing has increased the subsidies and support for domestic manufacturing while sharply increasing China’s already-record-breaking levels of investment. It is almost certain that much of the new investment will generate low or even negative returns.

This will not help rebalance the economy. As long as Chinese households must subsidize large amounts of inefficient investment, it will be hard for consumption to take off.