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Stoke domestic demand, says top economist

Nick Westra

The mainland authorities have revived the economy with trillions of yuan in stimulus spending but it is still in danger of another slowdown next year unless Beijing can promote long-term domestic consumption growth, the chairman of Morgan Stanley Asia said yesterday.

Stephen Roach said economic expansion across the border must now stem from domestic demand after being driven for decades by external forces.

'This is China's wake-up call, and they are going to have to change,' Roach said. 'If they are counting on external demand to turn around next year to restart the export machine, they are going to be in for a rude awakening.'

The mainland economy boomed amid double-digit growth for five consecutive years starting in 2003 as it churned out exports and acted as the world's factory floor. But exports have shrunk for the past 10 months and economic growth slowed to 9 per cent last year as demand dropped off amid the global downturn.

Beijing has rekindled economic growth by pumping trillions of yuan into infrastructure projects, but Roach said the government must also focus on achieving more sustainable growth in domestic consumption. He said the authorities should promote consumer spending by creating a social safety net that bolsters pension plans and insurance programmes.

'China has taken some steps in those directions, but they've been baby steps,' he said.

'It needs to do more and only then can it draw down high levels of fear-driven precautionary savings and put those funds to work in internal private consumption.'

In the meantime, mainland authorities seem intent to keep the economy running with an aggressive monetary policy that has pumped out more than eight trillion yuan (HK$9.1 trillion) worth of new loans this year on top of a four trillion yuan stimulus plan announced in 2008.

Yi Gang, a deputy central bank governor, said new lending growth did not risk overheating the economy, according to Bloomberg.

'Overall, the situation will converge to a sustainable level,' Yi said at the weekend. 'In August, it was already not too much. June and August were pretty flat.'

The flood of liquidity has stoked internal investment and domestic consumption. Retail sales jumped 15.4 per cent in August for the largest monthly increase since January.

Improvements in internal growth should help steady the mainland economy, Frank Li, an analyst at JP Morgan, wrote in a recent report.

'Growth is likely to moderate in coming quarters,' Li wrote. 'The main adjustment [may be] a rotation in the sources of growth away from public investment and towards consumption, private investment and exports.'

JP Morgan maintained its mainland growth target this year at 8.4 per cent and raised its estimate for next year to 9.5 per cent from 9 per cent.

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