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China's Efforts to Stimulate Consumption Face Challenges

As China's exports surged 44 percent in June from the same month last year, economists urge Beijing to ease its reliance on exports and to stimulate domestic consumption to help rebalance the global economy. Some economists say the debt crisis in Europe could add pressure on China to rely less on export income and more on domestic consumption.

The European Union is China's biggest trading partner, but a depreciating euro could push European consumers to buy fewer imports. In addition, a strengthening yuan is making Chinese products more expensive abroad.

This could hurt China's economy, which relies heavily on exports for growth. To reduce its vulnerability and to help the global economy, economists, international financial organizations and U.S. and European officials say China should encourage more private consumption.

Glenn Maguire, an economist in Hong Kong for the French bank Societe Generale, says China has tried.

"It's been talking about rebalancing towards consumption in the last two five-year plans, but it has not been able to achieve that," said Maguire.

Last year, to help cushion the economy from falling export demand because of the global financial crisis, the Chinese government handed out coupons to families to buy appliances such as refrigerators and washing machines. It also increased pension contributions for state workers.

Those steps increased domestic consumption, but not enough to radically shift from an export-dependent economy to a consumption-led one.

Olivier Blanchard, chief economist of the International Monetary Fund, says moving away from an export-driven economy is not easy.

"That implies a number of structural measures on savings and investment, and probably implies in general an appreciation of their currency to move activity to domestic use," he said.

China eased its exchange rate controls last month in a move aimed at damping complaints from its trading partners that it has artificially kept its exports cheap with a weak yuan. A stronger yuan also raises the ability of Chinese consumers to buy imports.

Wages also are rising in China, but Societe Generale's Maguire says that has had little effect on the overall economy.

"But with the pay rises your average Chinese worker is not rushing to buy BMWs, which have become 15 percent cheaper [because of the euro depreciation]," said Maguire. "What they are actually looking at the marginal change of income, seeing little bit more purchases of food, of clothing, of household appliances that are produced domestically. There we see a rebalancing of consumption but it's very, very much at the lower end of the consumer basket."

In the long run, economists say, to rebalance its economy, China needs to provide social services such as affordable health care and education. That would allow people to spend more and cut the need to save so much.