China's consumers need to step up and spend if the nation is to avoid an economic hard landing. But in order for that to happen, the Chinese government must institute a number of reforms to give the nation's consumers the confidence to stop saving and go shopping. While the government is taking steps in the right direction, more will be needed to arm Chinese consumers with the necessary buying power to keep the country's economic engine from sputtering out – threatening to derail the already fragile economic recovery in the West.
Last month the Chinese government shocked economists around the globe by announcing that the nation's economic growth target for 2012 would be just 7.5%. While hitting such a growth target would be an amazing feat for a mature economy like the United States, it is scarily low for China. After all, the country grew between 9.2% and 14.2% over the last five years, most of which followed the rumblings of the global financial crisis.
Since the target was lowered, traders and fund managers on Wall Street have become increasingly worried that China might experience a much harder economic correction, which they refer to as an economic "hard landing." There is no definition as to what would constitute a hard landing versus a less acute soft landing, but the general consensus seems to believe that China would have a hard landing if its economic growth rate for the year was below 4% to 6%. Again, such high growth rates would be welcomed in more mature economies, but for China, it would be a big blow to the nation's economic master plan.
So how can China prevent a hard landing? The Chinese government believes that it needs to finally reduce its economic growth away from the fickle export market and stimulate more internal economic growth through increased consumer spending. China is a command economy, meaning that its leaders have elaborate plans that steer the nation on a certain economic path. The transition from export powerhouse to a consumer-driven economy wasn't set to occur for another few years in Beijing's long-term growth plans. But the 20% drop in Chinese exports since 2007 has forced the nation's central planners to move up the timeline and focus on the Chinese consumer to fill in the economic gaps left from weakening export growth.
Beijing's plan to fill that gap centers on increased government spending. The Chinese government authorized a 2012 fiscal budget deficit target of 2% of GDP, up from 1% in 2011. The increase in spending will be invested in infrastructure, education, social housing, social security and healthcare.
Deficit spending has its virtues, but the size and scope of the spending here doesn't seem to be adequate to get China's economy going. After all, the special $600 billion economic stimulus package the Chinese government made a couple years back at the height of the global financial crisis has had mixed results. The stimulus, as big as it was, failed to stem the nations declining growth rate. That may be because the scope of the spending was directed to fixed asset investment projects, like building a new port or improving a roadway, and not toward boosting consumer spending. The extra cash the government is slated to invest in social programs may make life better for the average Chinese citizen, but it won't necessarily help boost economic growth – at least not to levels needed to fill the gap from decreased exports. What China needs to do is empower its consumer base and save on the social welfare.
