CNN.com - Good on paper, problems underneath

Editor's note: CNN International TV brings its global resources to China in early April for its "Eye on China" special programming.

China's rulers want its 1.3 billion people to spend more.

• Growth fails to soothe anxieties

• China looks to ease growth pace

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WORLD'S BIGGEST ECONOMIES
1. United States
2. Japan
3. Germany
4. China
5. United Kingdom
6. France
Sources: World Bank, Chinese Govt.

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CHINA'S TOP-SELLING CAR-MAKERS
(based on 2005 sales, all models)
1. Shanghai GM
2. Shanghai VW
3. China FAW Group
4. Beijing Hyundai
5. Guangzhou Honda
6. Tianjin FAW Xiali
Source: China Association of Automobile Manufacturers

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(CNN) -- For the Beijing power elite charged with delivering a measure of prosperity to China's 1.3 billion people, the Year of the Dog could well be renamed the Year of the Consumer.

China's rulers somehow have to persuade its people that while the late paramount leader Deng Xiaoping's dictum that "to get rich is glorious" still holds, it is also better for the economy to spend than to save.

After a 9.9 percent economic growth rate in 2005, China looks to be on track to deliver another year of impressive gains, though Premier Wen Jiabao surprised observers with his March work report projecting a figure of just 8 percent. That is much lower than the 9 percent-plus estimate still being used by bodies such as the World Bank.

While that looks good on paper, the strains are starting to appear in the export and investment development model that China has used so successfully for the past 25 years. Friction with big trade partners such as the United States is just one manifestation of the problem.

China for years has churned out exports as the world's factory of choice -- a strategy that has helped lift the nation's economy to No. 4 in the world, with a nominal gross domestic product of $2.2 trillion.

The government focus for 2006, however, is expected to follow 2005 in trying to stimulate more spending at home.

That is likely to mean more agricultural tax breaks, more pay for urban workers and more holidays so the populace can go shopping.

On March 14, the government set out its 11th five-year plan covering 2006-2010, in which it forecasts a 7.5 percent growth average on the basis of reduced energy consumption and pollution discharge.

The new plan is viewed as signifying a major shift of economic policy away from urban development and heavy investment in certain sectors to more investment in the rural and science and technology areas, to promote sustainable development.

As part of moves to cool the economy, investment in areas considered already to have over-capacity, such as automotive, steel and aluminum, is being strictly limited.

While overseas marketers have long slavered over the prospect of selling "just one pair of socks" to every Chinese consumer, the reality is that wealth and income is highly concentrated, and per-capita spending remains very low for most of China's rural population.

Cars, for example, may clog the streets of Beijing and Shanghai, but the total automotive market still has a long way to grow. While car sales in 2005 reached 5.7 million, industry commentators expect an annual 10 percent expansion for another two decades.

Growing wealth gap threatens stability

There is a huge wealth gap between the affluent east coast and the much poorer hinterland, despite China's invitation for domestic and international investors to "go west" to aid development there.

Commentators such as Andy Xie, Morgan Stanley's Asia Pacific chief economist, worry that without more domestic consumption, China's economy runs the risk of falling into further imbalance, with all the attendant strains that carries, including more social instability at home and trade friction abroad.

Adding to the complexity of the economic challenge confronting China are a host of other issues:

Xie, who is based in Hong Kong, argues that China must act to expand domestic consumption to decrease the trade surplus and take some of the heat out of the complaints by trade partners.

In a study released on February 27 titled "Time to Change," Xie suggests three measures to achieve that: increased income support for the rural population, a higher minimum wage, and a cash return of government-controlled assets to the people.

Specifically, Xie wants China to increase rural income support from 1.6 percent of gross domestic product (GDP) last year to 3 percent by 2010, through issuing rural support fiscal bonds. Such support would be worth 1 trillion yuan, or about $123 billion at an exchange rate of 8.1 yuan.

Xie says raising the minimum wage is critical to stabilizing the countryside, and wants the minimum tripled by 2010.

"While some loss of competitiveness in trade could decrease employment in the export sector, it could be more than offset by the effect of rising consumption," he notes.

His third policy change would see a return of about 15,000 yuan (about $1,850) per person through collecting central and local government wealth (businesses, land, natural resources) into a national fund and then distributing it equally among households. This, he says, could set off a consumption boom lasting a decade.

Economist: Integration constrains 'aggressive foreign policy'

On the external front, Chicago-based economist David Hale believes that China will probably be the world's largest exporting nation by 2010, overtaking Germany and the United States in the next five years.

Hale, who has just completed "In the Balance," a landmark study of China's growth and its implications for the Asia-Pacific region, says that on a purchasing-power basis, China's real GDP is "probably already at $5 trillion-6 trillion and thus No. 2 in the world."

He notes that China is now so integrated into the global economy and such a big consumer of raw materials (including oil and base metals) that its capacity to pursue an "aggressive foreign policy" is constrained by the risks that might pose to its economic prosperity.

He says it is in China's strategic interest to promote an open multilateral trading system rather than a world characterized by regional trade agreements.

In Hale's view, "the greatest challenge now confronting China is to complete the transition to a transparent market economy with a democratic form of government."

Good on paper, problems underneath

Friction at home and abroad threatens China's economic blueprint

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Growing wealth gap threatens stability

Economist: Integration constrains 'aggressive foreign policy'