Give the people's assets right back to the people

A surprising number of readers have written in to dispute yesterday's column, which asserted that Chinese consumers aren't living up to the world's hopes.

In case you missed it, Wednesday's Monitor pointed to a steep slump in China's retail sales growth over the first two months of the year. Together with a deep decline in consumer confidence, the drop prompted Monitor to wonder if Chinese consumption growth is really going to be the great global economic force that so many around the world hope.

Despite recent increases in wages, Chinese earners still seem to prefer saving to spending, salting away more than 40 per cent of their income each month.

'Garbage', declares Tao Dong, head of Asian economics at Credit Suisse. Tao argues forcefully that mainland consumer demand is booming. He says that official figures fail to capture China's thriving grey market, and points out that more Buicks are now sold in China than in the United States. 'If that's not an auto boom, I don't know what is,' he says.

Tao is certainly right that consumer demand in China is growing, but the problem is that it is not growing as quickly as the overall economy. In other words, consumer spending is shrinking as a portion of China's total output, which means the country's growth is propelled by ever rising levels of investment. Even senior officials acknowledge that's unsustainable.

But changing direction is proving difficult. Over the past four years, government bigwigs have claimed repeatedly that they want to encourage people to go out and spend more. Yet over the same period household spending has shrunk as a proportion of gross domestic product.