Stimulate the Domestic Demand

The amazing growth rate of the Chinese economy has partly driven by the export growth of the manufacturing sector. "China is the world factory," as they say. It's done by maintaining a certain level of price discrepancy by a currency peg to the USD, attracting FDI while supplying abundant labor force to the world.

Now the export (around 35% of GDP in '07) is deteriorating responding to the global recession, how to stimulate the domestic demand becomes more important.

It's actually an old topic that's been talked about for years. Chinese economy saves almost 50% of GDP, hence the high investment rate. In comparison, the U.S. saving is 20%. As for the household sector, the Chinese saving rate is 50%, while that of the U.S. is virtually zero.

I have some random thoughts on the disparity of the consumer saving/spending rate between China and the U.S.:

First, there's a cultural thing. US consumers have a passion on shopping for some reason. read Born to Spend, I shop therefore I am for an understanding.

To support it, US has a well developed consumer credit market: the total consumer credit outstanding stands up to $2.6 trillion. It's not only mortgages, but HELOC, car loans, credit card, etc. it allows you to pay installments even for furniture.

Besides, US has a consumer credit system to back it up. Every citizen has a credit score, a historical score keeper for your past credit borrowing and repayment as well as a gorge for creditors' lending decisions.

A sound social safety net (pension, healthcare, unemployment insurance) is also significant. Although the US doesn't carry too much pride in this area - the Viking countries are role models - it should be well developed.

Income inequality counts. I'm not against Grandpa Deng's "Let some get rich first" policy, but some part of Chinese population is really, really poor. If someone brags to you the market size of cell phones in China, saying "if everyone buys a phone, it's a 1.3 billion market." he's bullshitting.

Finally, there's the long-term economic and social stability.

What's not on the list is a booming stock market. If you're a frequent reader of this blog, you know that I have some beef with "十教授上书建议扩大内需把提振股市作为切入点." The last post is here.

Those lame ducks spoke again today:

"是不是能够使用资本市场的提振措施来刺激国内的需求，从1998年的时候刺激房地产，刺激股市，的确对后来的内需起到了很大拉动作用，这在十年前是有成功经验的。10年前已经有过成功经验的情况之下，推出这样一个以刺激股市为内容之一的内需提振政策，我想应该是有点效果的。"

"根据美国经济学家的测算，就是行情好的时候，财富 效应对消费需求具有一个固定的带动系数，比方说，股票涨了100元，肯定其中要有7元或8元钱，拿来去消费。这是一种非常巨大的消费需求支出比例。"

I've never heard of US federal government interfering stock markets. In fact, they hate doing it.

What are you suggesting, professors? A government-led Ponzi Scheme?

I want my digital TV.