Stephen S. Roach of Morgan Stanley has come out with a report suggesting China’s only way out of U.S. consumption based growth is producing their own consumer society. Here’s a rundown of the key points.
- China has no choice but to abandon the growth model driven by U.S. consumption which has been in place as U.S. deleveraging will crush export demand.
- China will have to respond with a new five-year plan, centered on the construction of a services economy, based upon the Chinese consumer.
- This services economy will have to make up a massive consumer spending gap if it is going to fill the void left by the declining growth of the U.S. consumer that has propelled China’s development.
- China could choose to move to make itself more competitive, but those very moves could lead to protectionist responses from Western governments, eliminating their benefits.
- Moves will be made on three fronts to spur domestic demand, including aid to rural areas, creating a new services economy, and the creation of a stronger social safety net. All of these, in concert, will push Chinese citizens to spend.
There is quite a consumption gap to be made up.