"A great leap in consumption is possible if China can keep the corporate savings rate under control" —Ardo Hansson, lead economist for the World Bank China Office (COURTESY OF THE WORLD BANK CHINA OFFICE)

With a handful of favorable policies in place, China has high hopes to spur a thriving consumer market. So what can China learn from Western countries in propelling consumption? Will the rural market be the next growth engine? Ardo Hansson, lead economist for the World Bank China Office, shared his views on these issues with Beijing Review reporter Hu Yue. Edited excerpts follow:

Beijing Review: A relatively high savings rate helped stabilize the Chinese economy when the financial crisis filtered throughout the world. But export woes placed an onus on the consumer market as a source of growth. How should the country strike a balance between savings and consumption?

Ardo Hansson: As China pushes forward an economic shift to rely less on exports, it needs to lower the savings rate so that consumption can go up. A modest drop in the savings rate brings no risks to the country, and instead can help with the economic rebalancing. For the rest of the world, this would deliver a boost to their exports.

Generally there are three kinds of savers: households, enterprises and the government. The savings rate of Chinese households is almost at the same level with other Asian countries. What really depresses the consumption here is the fact that Chinese households have a relatively low level of disposable income. So one viable solution is to moderately lift the deposit interest rate so as to increase household income.

The biggest potential for reducing savings actually lies with the enterprise sector. The enormous profitability of the manufacturing industry has translated into a high level of corporate saving. If this level can be decreased, the consumer market will have a stronger ability to prosper.

The Chinese Government has handed out generous policy incentives to spur the consumer market. Have you seen any substantial improvements in the sector?

This year investments are growing much faster than any other component of the Chinese economy because of the government spending spree. But even in this environment, we can still see a significant contribution of consumption to the economy.

The short-term incentives are now focused on automobiles and home appliances for rural residents, and are triggering obvious advances in the consumer market. But the problem is you cannot keep the tax waivers and cash subsidies going on forever, so you have to replace them with more permanent incentives and reduce precautionary savings, for instance by repairing the social safety net.

Of course the Chinese culture of saving will not change overnight, and it will take time for the consumer sector to gain strength.

What do you think China can learn from Western countries in encouraging consumption?

There are a few things China can learn from the Western world. One is to have a vibrant service sector that gives people opportunities to spend money.

Improvement in the social safety net could also help with consumption. The reform should focus on areas that are causing particular reluctance to spend, such as catastrophic insurance, pension systems and education systems.

In addition, there are opportunities to reform the grassroots-level household registration systems so that people can feel more comfortable moving from one place to another without worrying that they cannot take their health benefits with them. This will be a needed boon for consumption and the urbanization process.

It is also necessary to provide consumers with better access to finances, such as credit cards and small consumer loans.

Do you think the rural areas of China have deep potential for a leap in consumption?

There is some potential, as a large number of Chinese rural households still do not own television sets, refrigerators or mobile phones. But rural residents can be more prudent in consumption because they are relatively poor. This will keep a lid on the rural consumer market.

As more rural residents settle down in big cities, the urban market is likely to gather force. Of course this reinforces the need to tackle the social system barriers faced by migrant workers.

There are worries that China cannot afford Western-style consumption behaviors because of its huge population and limited access to resources. What is your opinion?

I do not think China has reached the point where it has to worry about unaffordable consumption. That would only happen in countries that record a large number of trade deficits and a low level of investments. What China needs to do now is to sustainably narrow the huge trade surplus and sell more products to its own residents.

Some analysts raise concerns that high house prices may choke consumption. But real estate is one of the pillar industries of the Chinese economy. So how do you think China should cope with the dilemma?

Soaring house prices are indeed deterring consumption of low-income households as they save to buy a house. But homeowners would feel richer when the prices go up, and therefore increase spending. If households are allowed easier access to mortgages, it would be easier for them to buy a house and at the same keep consuming.