George Kerevan: China faces dilemma over consumption v saving

George Kerevan
George Kerevan
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CHINA’S new leaders have had a bit of luck – or was it intended? Yesterday brought a raft of positive economic data regarding the Chinese economy.

Beijing has been trying to curb inflation by squeezing bank lending. Unfortunately the squeeze proved too tight and seven successive quarters of slowing activity followed. In response, Beijing has turned the fiscal and monetary taps back on. Interest rates have been cut twice this year.

Yesterday, the first bamboo shoots of recovery finally appeared, with factory output jumping to an annualised 9.6 per cent. Better still, inflation is at a three-year low, providing room for further monetary expansion. Analysts quickly raised China’s growth forecast for 2013.

However, for the once-a-decade Party Congress in Beijing, this good news is merely a respite from a longer-term problem: can China escape the so-called “Lewis Point” of economic development?

This is named after Nobel-winning Caribbean economist Arthur Lewis, who postulated that developing countries reach a critical barrier when they have used up their surplus labour, but where gains from further capital investment are absorbed by wage increases.

Nations usually remain stuck in this middle-income zone unless they can boost productivity and domestic consumption. Of the 100-odd countries at the Lewis Point in 1960, only 13 have since achieved Western-style per capita incomes. China may be populous but its “one child” policy has strangled the supply of fresh workers on which its metal-bashing export industries rely. Meanwhile, wage costs soar.

To move on, China has to raise consumption spending. But how do you get people to spend instead of saving for their old age, when there is no welfare net? And how do you boost productivity when loss-making state-owned firms still dominate half the economy?

Obama may have to act to avert airline war

A BAD week for the airline business. IAG, created last year through a merger of British Airways and Iberia, announced it was cutting a quarter of the Spanish airline’s staff and slashing routes by 15 per cent. IAG chief executive Willie Walsh warned: “Iberia is in a fight for survival”. Which rather begs the question why he wanted to merge with it. Since IAG was formed in January 2011, its shares have plummeted around 40 per cent.

Meanwhile the world’s airline business faces a ruling from the EU that it must comply with new emission rules by 30 April or face fines. The EU is capping carbon dioxide emissions for all planes arriving or departing from European airports, but allowing airlines to buy and sell “p… [+]ollution credits”, supposedly rewarding the fuel-efficient ones.

But non-EU countries (including China and America) are threatening legal action and trade retaliation unless granted exemption. It’s up to newly re-elected President Obama to avert an airline trade war.