Can the world spend its way out of recession?

In the aftermath of recession, experts and international agencies such as the International Monetary Fund (IMF) often advise this strategy: countries are told to hold tight on currency flows as part of a painful set of austerity measures, let exchange rates drop, then boost exports and productivity as a long-term solution. Can the world shop its way out of recession this time? In the past, American consumers shopping like there's no tomorrow have come to the world's rescue, but in fact American overspending and risky lending were key factors precipitating the current economic meltdown. Experts discussed this issue recently in Beijing, at "The Currency of Trade," a forum hosted by Arizona State University, the Kearny Alliance and Tsinghua University.

Can the world shop its way out of recession? That's a question posed by analysts, economists and politicians around the globe. Confronted by gloomy economic data, they cannot help but cast a wistful eye on the past. Nations that watched their currencies crash managed to ramp up exports and their overall economy in the aftermath of recession.

Experts and international agencies such as the International Monetary Fund (IMF) often advise this strategy: countries are told to hold tight on currency flows as part of a painful set of austerity measures, let exchange rates drop, then boost exports and productivity as a long-term solution. But that formula has always featured a single constant factor: American consumers spending as if there were no tomorrow.

Missing factor: American buyers

But, reliance on American consumers is no longer feasible. In fact, American overspending and risky lending were key factors precipitating the current economic meltdown. Americans spent and borrowed far beyond their means — boosting exports and keeping the world humming for decades — until debts finally came due. Now, as the crisis appears to be easing, Americans may have learned some of the lessons of austerity.

Savings, practically zero before the economic meltdown, are reaching ranges of 5 percent. With a new aversion to overspending, Americans clearly will not provide the post-crisis buying required to pump life into moribund economies around the globe. Can some of the world's developing economies take America's place? That's a question posed frequently by economists, who survey booming economies like India, Brazil and China.

Among these emerging nations, experts say, only China has the size and affluence to be considered as a replacement candidate. "Will China Lead the Global Economy Out of the Recession" was the topic of discussion at "The Currency of Trade," a forum in Beijing hosted by Arizona State University, the Kearny Alliance and Tsinghua University.

"Will this crisis change trading patterns? Will we have a change in trading patterns around the world?" asked speaker Xiao-Shen Chen, CEO of Shenyin Wanguo Research and Consulting. "Chinese people want to consume more, to buy houses and cars," he asserted, but suggested the transition from export-oriented to consumer-consumption economy was far off. Other economists detailed the factors and challenges.

China's new middle class

It's not merely the enormous size of China's population — about 1.3 billion, or over 20 percent of the world's people — that attracts all the attention. It's also the growing size of what many might term the middle class. Estimates vary widely, but there are somewhere between 120 and 250 million Chinese consumers coming of age with greatly increased earning — and spending — power.

Experts purposefully term this "China's middle-income group," to emphasize that it doesn't exactly correlate to Western concepts of middle class. Earnings are vastly beneath middle class wages in Europe or the U.S. But, as costs are lower in China and families tend to pool wages, people in this class clearly have the kind of cash that allows them to easily splash out on cars, homes and luxury goods.

The figures bear this out. Chinese consumers have been buying cars at a ferocious pace, sometimes adding a million vehicles a month to Chinese roads. From January to August of 2009, passenger-vehicle sales soared 37 percent, topping 6.2 million, according to the China Association of Automobile Manufacturers. Total vehicle sales in the same period were 8.33 million, a 29 percent increase over the same period in the previous year.

China is now the world's second largest auto market and, if U.S. buying continues to slump, should surpass America this year to become number one. China's real estate market, which plummeted along with property markets worldwide, has since recovered, much faster than almost anywhere else. "The rate of recovery has been a big surprise," noted Chen. "The speed of the real estate [rebound] has been incredible."

In fact, property prices have begun surging in major Chinese cities, leading many economists to worry about a new, uniquely Chinese market bubble. Meanwhile, retail sales soared over 15 percent in the third quarter of 2009 in China, nearing totals of 9 trillion Yuan (US$1.31 trillion) according to the October 2009 report from the official National Bureau of Statistics. Luxury sales have also been robust in China, even as they taper off or plunge around the globe.

Chinese cities like Beijing have become the top sales points for brands like Rolls Royce and Bentley (edging more developed, wealthier enclaves like Hong Kong), and China currently accounts for an estimated 12 percent of all luxury spending. But the number of people able to afford such items could quadruple in just two years, to 160 million people, according to an October 2009 report in The Economist.

Clearly, China offers a rare beacon of hope for economies still mired in or struggling to find footing in the economic meltdown. The IMF in late September modified its predictions upwards, projecting that China's economy would grow by 8.5 percent in 2009, and 9 percent in 2010. China's huge economic stimulus won lavish praise in The Economist's report, which speculated that the resulting gains could spread through the region: "The policy stimulus in China could support recoveries in other parts of Asia."

Can China lead the world recovery?

So, will China be an engine of salvation for the global economy? As China grows to genuine status as a world power amidst what many call "China's Century," will Chinese consumers replace the spending-averse Americans to lead the world out of recession? There are no certain or easy answers, but experts are pessimistic, pointing to longstanding problems with the Chinese financial system and misconceptions about the Chinese marketplace.

They say the Chinese economy has long depended on unsustainable inputs and subsidies that scream for rebalance. The crisis may actually worsen the imbalances, many caution, as China props up its own economy. "There are all these optimistic assessments floating around with regards to China," said Michael Pettis, professor of finance at the Guanghua School of Management at Peking University.

"There is all this hope that consumer spending in China will increase, that China will somehow save the world. I just don't see that happening." Pettis explained how China's entire financial and investment structure makes this unlikely. China's economy continues to steamroll along at near the double-digit growth rates of recent decades, but little of the profits or returns trickle down to the average person, and thus are not available to boost consumption.

Most gains, he noted, and all the foreign investment, are accrued by former state companies. And most of these companies don't pay taxes or issue dividends, according to top Chinese financial experts. They suggest that reform of the system was required not only to generate more tax revenue, but to get big companies to take more responsibility for services like health care and pensions.

As China continues its enormous transition from a hulking, centrally-planned state economy to one following more norms of free-market commercialism, too many assets have remained with the old state companies, these experts say. At one time state-owned firms retained too little profit, but over the last seven years, company profits have skyrocketed, while consumer disposable income has decreased.

Don't bank on China

Though there is widespread agreement in Beijing about the need to move away from an export-oriented economy to more high-valued production, sustainability is an issue. Further, experts are concerned that a time of crisis is the wrong time for major changes in the Chinese economic system. As to consumer spending escalating, Pettis said it would be difficult to pry Chinese away from traditional high rates of savings.

Until the government provides reliable health coverage and pensions, workers will squirrel away savings as a personal safety net. "What we are looking at is a long-term process, at best," he added. "We don't need these changes to happen in five or six years. For China to have any impact, we need them now, and that just isn't going to happen."

Many believe China's ability to greatly impact the global economy is overstated, in any case. Even with rapid rises in earnings, the country's gross national income stood at $2,770 per capita in 2008, according to the World Bank. This was a remarkable gain from $750 in 1997, but still left China ranked 130th among 209 countries worldwide.

"China has among the fastest growing consumption rates in the world," noted Pieter Bottelier, senior adjunct professor of China Studies at John Hopkins University. Still, he added: "Chinese consumption relative to the country's GDP is among the lowest in the world." Economic statistics bear this out. Even as China's economy regained its strength, demand for imports has lagged greatly.

Overall, imports fell 3.5 percent year on year, according to the latest figures from the National Bureau of Statistics. "I think it's clear that China won't solve the United States' economic problems, and the U.S. won't solve China's problems," Bottelier said. "China's role has always been as a supplier," agreed Wu.

She said the two could not be compared. Even with four times as many people, China still accounted for less than a third of America's share of global GDP. "China cannot replace America to provide a major boost to the world economy. China has a long way to go."

Bottom Line:

• With a population of about 1.3 billion, or 20 percent of the world's people, China is also claiming a burgeoning middle class of 120-250 million. They have growing affluence, and a huge appetite for real estate, cars and luxury goods. A million vehicles are added to Chinese roads every month, as China is poised to overtake America as the world's largest car market.
• Retail is robust in China, with sales up 15 percent in the third quarter of 2009. Meanwhile, China accounts for 12 percent of the world's luxury purchases, and that percentage will rise steadily in coming years.
• China's economy has recovered and will grow by 8.5 percent this year, according to the IMF, and 9 percent in 2010. The gains will likely lift the entire Asian region.
• Yet experts say China will not boost the global economy, at least not soon. "What we are looking at is a long-term process, at best," said Michael Pettis, professor of finance at the Guanghua School of Management at Peking University.
• China's consumption rates are rising fast but remain low, said Pieter Bottelier, senior adjunct professor of China Studies at John Hopkins University. "I think it's clear that China won't solve the United States' economic problems, and the U.S. won't solve China's problems."