The Perils Of Thrift.(International Edition; ASIA)(Chinese economy)

Byline: George Wehrfritz

China's crisis is the opposite of America's.

The subprime-mortgage crisis laid bare America's decadence. The world's largest economy is rife with overconsumption of everything from McMansions to tchotchkes from Target, cursed by negative real savings rates and weighed down by debt that has spilled from Wall Street to Main Street. Yet China's role in the binge is less understood. As America's primary enabler, the world's fastest-growing major economy furnishes massive capital infusions that keep the U.S. financial system afloat, and its factories make most of the stuff Americans buy. The relationship is symbiotic and mutually intoxicating, argues Tom Holland, a Hong Kong-based financial columnist. He calls the two giants "drunkards reeling crazily down the pavement in a tight embrace."

As such, one of them can't do a face plant in the gutter without the other toppling too. That, at least, is the risk Beijing policymakers run today unless they sober up and execute a delicate industrial pirouette economists call "rebalancing." It entails consuming much more of national output at home, relying less on exports and slowly weaning the American financial system off cheap Chinese credit. The problem: China's economy is as thoroughly hard-wired against consumption-led growth as America's is for it. And all the money in the world--even the $1.8 trillion in China's foreign reserves--can't buy a quick fix. Here's why:

China's domestic consumption was an anorexic 38 percent of its GDP (a third less than India's) in 2007. The other 62 percent came from investment, much of it spent on export-oriented infrastructure, plus net exports. Consumption as weak as China's is unprecedented even for a developing industrial economy, and it makes the shift to a domestic demand-led growth model following the 20th-century pattern set elsewhere in East Asia extremely tricky. The idea that China can make this transition smoothly from such a "skewed position -- is rather naive," says Hugh Young, managing director of Aberdeen Asset Management Asia.

The problems begin with China's national savings, which are as hard to trace as America's subprime debts. China has accumulated huge cash hordes of indeterminate size and ownership. World Bank economists Bert Hofman and Louis Kuss estimate that China's gross savings reached a staggering 50.6 percent of GDP in 2006, up from 40.7 percent a decade earlier. Yet they calculate that household savings dropped from 20.1 to 15.3 percent of GDP during the same period, while savings by enterprises nearly doubled to 28.3 percent of GDP. Behind this growth chart is a deeply troubling truth: China Inc., not the Chinese people, has prospered ...