China Must Be Consumer Society, Says World Bank

China must make greater efforts to encourage consumer spending in the hope of reining back its surging trade surplus before it creates dire consequences for the local environment, the World Bank said yesterday.

The development bank also warned the country's export-led boom would cause imbalances in the economy. To keep up growth averaging 10%, the bank said, Chinese leaders depended on an unsustainable increase in manufacturing output.

Rising labour costs and increases in the price of raw materials meant Chinese companies were spending more to create the same output than rival countries such as India. The bank said attempts by the government to squeeze investment growth were helping the situation but needed to be matched by growth in consumer spending.

Bert Hofman, lead economist for the bank in China, said: "These considerations put a premium on measures to boost consumption alongside those already taken to reduce investment growth."

Though wages have improved significantly in China, most workers have preferred to save more rather than spend more on consumer goods or services.

Younger people in the cities have started to spend more using credit cards and other forms of credit, but the vast majority have kept their wallets tightly shut. Much of the saving is a reaction to the declining role of the state as an employer. Most benefits, such as healthcare, which in rural areas remains basic where it exists at all, were provided by employers. However, more than 50% of the economy has been privatised over the past 10 years and few of the new private sector employers have stepped in to replace state funding.

Most Chinese people are reliant on their families and private savings to pay for retirement and healthcare. While the UK has a savings ratio of barely 5%, China has seen it rise to 16%. If company saving is included the ratio of savings to income climbs to more than 40%.

The bank said GDP growth slowed to 10.4% in the third quarter, from 11.3% in the second quarter, after measures to reduce investment growth took effect. In the short term China is "relatively well placed to deal with a mild global slowdown, which would tone down overall activity and reduce the current account surplus", it said. To encourage businesses to cut investment in low-value goods the Chinese leadership needed to stop subsidising the cost of energy, resources, land and environmental damage.