Monday, February 16, 2009

Doing the Stimulus Chinese Style

What to do when the bulk of your country's economy is based on what you sell to other countries - and they stop buying? That's the conundrum facing China, which, despite a multi-billion dollar surplus, is seeing its exports deflate faster than a leaky tire.

The local governments' solution is to offer coupons to encourage its own citizens to start buying. Factories are closing in China and the rate of layoffs is increasing. It's the natural response to a lack of demand as export markets hunker down for a long, painful economic contraction. The Chinese government is creating a 585 billion dollar stimulus package that includes subsidies to encourage rural Chinese to go out and buy appliances. But local governments believe more needs to be done - and their answer is to give out shopping vouchers.

The vouchers are time to coincide with holidays and they're working, sort of. Sales are up. But analysts wonder if it will have any long term significance as the country struggles with an economy built on customers from somewhere else.

The vouchers serve an important PR function as well - it's hoped that they will be seen as the government showing concern for its people. And that's important. Because if things continue to worsen and the Chinese don't think they're being cared for, it won't take much to ignite riots. These are people on the edge - and when you're close to the edge chaos is just a short step away.

No comments: