Credit Where Credit is Due

In the old days, when communist central planning suffocated China’s economy, fixed-asset investment was the regime’s measure of economic progress. The more tons of steel produced, slabs of concrete poured, and gallons of crude oil pumped out of the ground the better. The consumption-based economy, to which the capitalist West had apparently succumbed, was written off as a paper tiger.

On the surface, nothing much has changed. China remains obsessed with investing –construction of factories and infrastructure accounted for 41% of GDP and around half of economic growth in 2005. Moreover, the country’s continuing high levels of fixed-asset investment make sense – building roads, water pipes, metro systems, telecommunication networks, and electronics factories is what a vast and rapidly modernizing country must do.

But the Communist Party leadership has decided that in the next decade hairdressers, accountants, karaoke hostesses, tour guides, and movie directors will be the new pillars of economic performance. As investment growth slows and export markets endure their unpredictable business cycles and protectionist moods, China will increasingly rely upon consumption for creation of jobs and income – and the service industry is where most consumption occurs.

There is only one problem: Chinese people do not seem to want to consume, at least according to commonly cited data. National savings amounted to roughly 50% of GDP in 2005, which apparently means that households are so afraid of hospital bills, school fees, and the down-payment on the new apartment they dream of that they save every penny they earn.