China economy at crossroads after 30 years of reform

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - Who would have thought a few months ago that China might end up remembering 2008 not for the Beijing Olympics or May's Sichuan earthquake but for the demise of the country's model of economic development?

Might is the operative word. China's attachment to investment, exports and heavy industry runs deep.

After all, these have been the drivers of the remarkable growth of 10 percent a year that China has enjoyed since it embarked on market reforms 30 years ago this month, lifting hundreds of millions of people out of poverty in the process.

Weaning the economy off exports in favor of domestic consumption driven by services is easier said than done.

But the closure of thousands of factories as export demand evaporates has dealt a serious blow to China's confidence. President Hu Jintao has gone so far as to say that turning the challenges posed by the global credit crisis into opportunities would be a test of the Communist Party's capacity to govern.

China, in short, realizes it needs to stand on its own feet.

So expectations are running high that a meeting starting on Monday of China's top leaders to chart economic policy for 2009 will finally get serious about boosting home-grown spending.

The scale of the task is daunting. Household consumption last year made up just 35.3 percent of China's gross domestic product, a record low for a major country in peacetime. In the 1980s, it was over 50 percent.

By comparison, the U.S. ratio last year was 72 percent. If America spends too much for the sake of global economic balance, China has taken thrift to new extremes. That needs to change.

Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, cites the pending nationwide expansion of a scheme offering a 13 percent tax break to rural buyers of televisions and washing machines as evidence that China is already looking to tap its own potential.

The initial pilot program in a handful of provinces led to a 40 percent increase in sales of household appliances.

"The fact manufacturers are turning to Chinese villagers rather than American consumers is a symbolic milestone in the global rebalancing story," Simpfendorfer said.

"This is a slow burn story. It won't save the global economy from its current problems. But it may help to shape the global economy over the next decade," he added.

GETTING READY

Raising the income tax threshold; pay rises for state workers; increases in housing subsidies and minimum income support; and extra outlays on health, pensions and education are among other ideas this week's strategy sessions will examine to get people to spend more freely.