Time for China to gear up for world economic slump

CHINA should rev up efforts to deal with fundamental economic problems including insufficient domestic consumption, uneven attribution of wealth and slow expansion of service industry to prepare the nation for a weak cyclical world economic slowdown.

Also, China should enhance the development of middle and western areas, along with reducing the production of low value-added products, said a report published yesterday by the Bank of China's research unit.

China may face a recession or hard landing under three conditions against the backdrop of a cyclical correction after six years of global economic boom, the report said.

- Sudden changes of macroeconomic policies due to uncurbed inflation;

- Serious export decrease coming with collapse of the world economy; and

- Excessive supply and deflation caused by much faster expansion of the production ability over the demand.

Although the above scenarios will happen only under quite extreme conditions, China should be wary of the risks.

"China's economy may become quite fragile if domestic consumption remains sluggish," the report said.

"Currently, investment and trade are drivers of China's economic growth. In case global prospects turn sour, China's fast growing economy could be in danger."

One of the reasons for people's reluctance to spend is uneven allocation of income.

The government's fiscal revenues and corporate profits expand much faster than growth of people's wages. Meanwhile, the system of health care and social security has not been fully established, which further curbs people's spending, said the report.

China's less developed service industry also makes the languid consumption worse.

In developed countries, revenues of the service sector usually account for 70 percent of their gross domestic product.

In China, however, the figure is well under 50 percent, which means people can go nowhere even if they want to consume.