Speaking in Hong Kong yesterday, United States Treasury under-secretary for international affairs David McCormick delivered a frightening message: the export-led growth model that has served China so well for so long could now be broken. 'This strategy may no longer be tenable in the face of a global economic slowdown,' he told his audience. The chances are that he is right. With major export markets including the US, Europe and Japan all teetering on the brink of recession, China's export growth has halved in inflation-adjusted terms over recent months. Beijing's response so far has included giving exporters a helping hand by cutting interest rates and increasing tax rebates on shipments of textiles, clothing and other low-margin goods. These measures may lend assistance in the short run, but the long-term outlook for China's export industries is looking increasingly cloudy. Following the abrupt end of the developed world's credit binge, households in the US and in some European countries are facing a protracted period of deleveraging. That means paying down debts and saving more, which in turn means less spending on toys, DVD players and running shoes imported from China. Some economists are even talking of a 'lost decade' for US consumers. The reference to Japan's lost decade of economic stagnation following the bursting of the bubble economy at the start of the 1990s is deliberate. As Japan deleveraged, consumer demand went into a tail spin, remaining depressed for so long that it never fully recovered before running into the demographic headwind of an ageing population and declining growth potential. Now according to George Magnus, the senior economic adviser to Swiss bank UBS and the author of a newly published book called The age of aging, something similar may be about to happen in Europe and to a lesser extent in the US. Within the next few years Europe's working age population will start to decline, while America's super-consumers, the baby-boomers, will begin to retire. That will mean slower income growth and weaker consumption in both markets. And while retirees do continue to consume, their consumption patterns shift more towards services such as healthcare and away from the sort of goods exported by China. The solution advocated yesterday by Mr McCormick is for China to re-orient its economy away from investment and export-led growth and towards greater domestic consumption. He's undoubtedly right that 'strong domestic demand growth ... provides the surest guarantee of both macroeconomic stability and sustained economic growth'. But getting Chinese consumers to go out and spend more will be a tough proposition, especially with consumer confidence at its lowest level in nearly four years (see the first chart below). Predictably, Mr McCormick suggested that Beijing should boost consumption by letting market forces determine China's exchange rate. Economists believe this would work, because, left to its own devices, the yuan would strengthen against other currencies in inflation-adjusted terms, raising the real income of Chinese consumers and encouraging them to spend more. Possibly, but the 20 per cent rise in the yuan's real effective exchange rate since the currency was revalued in 2005 (see the second chart) has eroded China's export competitiveness. With external demand slowing, and factories closing, pressure is mounting to slow the appreciation. Even worse, China is facing its own ageing problem. According to Mr Magnus, China's labour force is going to begin shrinking in the next few years. With old-age approaching, pensions badly under-funded and minimal state social security provision, persuading Chinese consumers to go out and spend a greater proportion of their income is likely to prove a lot harder than Mr McCormick thinks.