The World Bank sees hopes about an economic recovery in China as “premature”, according to David Dollar, country director for China. The main reason for the World Bank’s doubts about China’s recovery is low private investment. While stimulus measures have helped boosting fixed-asset investment and stabilizing the Chinese economy, private investment lags far behind government spending. Private investment is seen as the main driver of sustainable growth and job creation. For China, with its export sector down and large-scale stimulus packages unsustainable over the long run, private consumption is necessary to achieve sufficient growth over the next years.
China is intensifying its efforts to boost domestic demand by offering consumers a 10 percent subsidy for home appliance purchases. To make up for the continued lack in export demand, China desperately needs to push domestic consumption. Together with the home appliance stimulus, Beijing also announced that it would continue and expand an existing stimulus program for the automobile industry. Owners of old, less fuel-efficient vehicles are encouraged to trade them in for new cars by financial incentives such as purchase tax cuts. The new home appliance stimulus with a total volume of Rmb2 billion ($292 million) is aimed at China’s wealthiest cities, including Beijing, Shanghai and Guangdong.
Vivek Arora, the IMF’s chief representative in China, urged Beijing to step up efforts for a social security reform in order to push domestic consumption. Mr. Arora emphasized that reliable and secure social security, such as health care, pension funds and education, were needed to encourage higher consumer spending. China’s current social security system is far from being reliable and so far fails to cover the majority of the people. As a result, Chinese saving rates were at a record 49.9 percent in 2007, compared to 4.2 percent in the U.S. and between 5 and 12 percent in the EU. By securing a sufficient level of social security China could encourage private consumers to spend a larger part of their income, thereby boosting economic growth.
