China must lift consumption to sustain
the recovery
􀀗 This calls for rebalancing fiscal
stimulus from construction to education
and healthcare
China’s growth has rebounded strongly amid massive fiscal and
monetary stimuli. This infrastructure-led recovery will likely be
sustained into 2010, not least because the long-term railway and
road projects won’t fade overnight. If anything, the risk to our
9.5% GDP growth projection for next year is on the upside,
especially if exports recover faster than expected.
But to maintain this pace beyond next year, China must act
to further stimulate consumption to promote more balanced
growth. To a certain extent, the high and still-rising savings
rate of Chinese households reflects demographic trends and
cultural factors that cannot be easily altered in the short run.
Yet some macro policies, such as boosting fiscal spending
on education and healthcare, can lower Chinese consumers’
precautionary savings.
The next step for Beijing policymakers is not about how and
when to exit stimulus spending. Rather, we believe
rebalancing stimulus away from new construction projects
towards education and healthcare will become the new policy
focus in coming years. The recent launch of the plan to
overhaul the healthcare system – involving RMB850bn of
new fiscal spending over the next three years – is a good start.
But given the government’s nearly 40% savings rate and tiny
debt, we believe Beijing can and should double new spending
in these areas. Combined with a rising supply of welfare
housing and consumer credit, this is likely to prompt a gradual
pick-up in consumption growth over the next three years.