China must be cautious in raising consumption

Perhaps few would have imagined that no sooner had the eyes of the world moved from being firmly fixed on China during the August/September Olympics and Paralympics, those eyes would be right back in November - this time focused on Chinese leaders and the Chinese consumer as the world looks to China to keep high growth rates going and mitigate the effects of a global economic recession.

Chinese President Hu Jintao has said that China recognizes the importance of a strong Chinese economy for the global economy and the leadership recognizes its responsibilities to the world economy. After all, China now represents 6 percent of that output. Chinese Premier Wen Jiabao has also said that encouraging the Chinese consumers to spend is no easy task.

Indeed one of the remarkable things about China's 30 years of economic progress and many years of double digit growth is that it has been achieved without the stimulus usually found in Western economies of a high marginal propensity to consume (MPC) out of extra income, which multiplies further the initial demand increases from extra economic activity.