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To lift economy, China urges citizens to spend more

Beijing hopes stoking domestic consumption can boost its slowing economy. But convincing a nation of savers to spend more during hard times may be a tough sell.

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"People's ability to consume depends on their wages," which have been rising by about 10 percent a year in real terms, Mr. Kroeber says. The economic slowdown is bound to slow that pace, he points out, as people lose their jobs (more than 8 million people were sacked last year, according to official figures) and the pressure for wage increases eases.

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A nation of savers

It is also uncertain how much consumers will spend in a time of uncertainty even if they do make more money. Bank deposits rose by 21 percent in October, suggesting citizens felt more comfortable saving than spending any extra cash they made.

"The reason for the slowdown [in sales growth] is not a lack of purchasing power but a lack of consumer confidence," says Xu Zhengfei, marketing director for the Suning chain of appliance stores.

Like Mr. Li, the auto dealer, Mr. Xu says his firm will promote installment plans this year "as a way to boost demand and cope with the financial crisis."

The average Chinese family saves some 30 percent of its income, partly because China's social security net is weak; people have to rely on their own resources to pay for a hospital stay, for example, or for a child's education.

Since the Chinese stock market slumped, the real estate bubble burst, and the papers filled with gloomy international economic news, "people are saving because they don't feel secure about the future," says Li Fei, associate director of the Retail Research Center at Tsinghua University in Beijing. "Their confidence in the short term is down, and they are being thrifty."

"Spending is essentially a confidence issue," Kroeber agrees.

With its control over the media and experience with "economic propaganda," he says, the Chinese government is "reasonably good ... at managing expectations and ensuring a base level of confidence" among consumers, and is now paying special attention to such efforts.

Long road to a new growth model

Shoring up consumption, however, will at best cushion the unprecedented blow that the Chinese economy has taken from the international crisis, Kroeber cautions.

Even if consumption continues to grow by some 10 percent a year, as it has been doing recently, "that won't make up for the loss of growth in exports and investment," which are expected to be severe, he says.

Nor will it do much in the short term to reorient China's economic development model away from reliance on exports and investment in fixed assets toward the greater dependence on consumption that economies in Europe and North America display.

"That will take five or 10 years," says Kroeber, "and it will depend on improvements in the social services. Only then will people feel that as their incomes rise they can spend that income instead of save it."