Open the kingdom's . . . wallet!

FINANCE AND ECONOMICS: "Rebalancing the world economy (China): The spend is nigh; The second article in our series on global rebalancing asks whether China can reduce its trade surplus by consuming more," The Economist, 1 August 2009.

THE TAKE: "Get Out the Wallets: The world needs Americans to spend," by Fareed Zakaria, Newsweek, 10/17 August 2009.

The gist of the series: America must consume less and save more, so the three big surplus exporters of the global economy (China, Germany and Japan) must do the opposite--with China facing the biggest shift.

Good news is that the surplus is already shrinking, says the piece, and dramatically so in terms of merchandising. Some observers suggest China could have a monthly trade deficit within a year or two, as amazing and unbelievable as that sounds.

Meanwhile, China's current growth seems entirely built on domestic demand.

Yes, it's likely that China will have somn surplus for the long haul. Don't forget the 700m or so living on little. But there's enough domestic demand to contemplate China becoming a serious consumption pillar alongside the U.S. Truth be told, only about 10% of China's growth in the last decade was export driven, so we're talking about a tipping point long in coming.

The problem is that most of the domestic demand is investment vice true consumption, so infrastructure is king. Thus, China's capital spending could outpace America's soon event though it's consumption is one-sixth ours.

As Zakaria points out, "U.S. consumption is equal to the economies of China and India added together and then doubled."

It's not that consumption isn't growing in China, because it's growing fast. It's just that it could go so much faster if the savings weren't so high out of fear of catastrophic illness (health care) and the paucity of old age pensions, two huge weak spots for China. Even there, the government doubles such spending since 2005, only to see it account for a mere 6% of GDP instead of the OECD/Old Core standard of 25%. Point being, China won't be eliminating those popular fears any time soon. The gap to be made up is big.

But the article argues that it's the savings of companies that does even more damage. China's rise has made companies far richer than the workers. There's too much capital-intensive growth that does not create enough jobs or enough of the service side of the economy.

Solution? China must stop incentivizing such growth so intensely and encourage other forms. It must also allow the yuan to appreciate.

Both prescriptions will be very hard to fill.