November 14th, 2008
06:59 AM GMT
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BEIJING, China — The Hu Family now spends evenings at home instead of going out to dine or shop. They are petrified by all the bad news they see on TV– the financial meltdown in the West, the dwindling Chinese exports, the closures of factories, and the workers’ protests. "When I first heard about the financial crisis," says father Hu Bingyi, "I had a feeling that, wow, it's so near me. Will this affect us?"

It is already affecting many Chinese families. "We don't buy many clothes anymore," says Mrs. Hu. "We shop online, and more often we take the bus or subway or ride our bikes." To earn extra cash, she runs a sideline business selling pajamas on line. "We're still a little worried," she says. "We're not sure what the future will be like, so we still prefer to save money in the bank."

Not exactly what the Chinese government wishes. Last weekend, it announced the biggest stimulus package in its history to kick-start the domestic economy, which is now dragged down by the recession in the West and the dwindling demand for Chinese exports. Simply put, Beijing now wants Chinese people to spend and spend so as to tide China through the economic crisis.

The task will not be easy. The Chinese are typically risk-averse and are one of the world's most serious savers. China's national savings rate last year reached 56%, according to estimates by the International Monetary Fund (In comparison: Japan 29%, Europe 22% and U.S. 14%). They squirrel away so much of their disposable income because they are insecure about the future. "The Chinese have never had the kind of safety net that other people around the world have had and it just makes them very cautious and very conservative financially," says Jack Perkowski, author of Managing the Dragon, a book on his experiences as an investor-entrepreneur in China.

China's economy is still growing at a rate of about 9%, but that is down from 11.9% last year. That is relatively strong compared to the bleak economic forecasts in the West, but even a 3% drop in China's annual growth will be too steep for China's comfort because it could spike unemployment and lead to social unrest.

Households like the Hus fear they could lose their jobs or get sick. Because China's social welfare and public health care systems are in tatters, they can no longer count on the government to cover the costs of their children's education and family's medical bills. And with the one-child policy, they can no longer rely on their children for support in old age. In the meantime, they stash away their renminbi under mattresses or put it in low-yielding savings account.

Economists argue that the Chinese save too much and spend too little and it's actually bad for the economy. Beijing officials agree. For the past decade or so, China has been talking of reorienting its growth mode from one based on exports and investments to one driven by consumption - with little success. With China's exports dwindling steeply, they now hope to take up the slack by boosting domestic consumption. "We need to keep savings and consumption at a normal balance and coordinate the relationship with each other," Premier Wen Jiabao said. The $586 billion stimulus package he announced recently is full of incentives for consumer spending. "I still expect the domestic demand will compensate for the loss of jobs in export centers," opines Justin Lin, chief economist of the World Bank. "China will switch to domestic demand and maintain growth rate between 8 to 9 per cent."

But such fairly optimistic forecasts are lost among middle-class families who hear one bad news after another. "We worry that one day we will lose our jobs if our company fails," says Mrs. Hu. "If prices keep going up, we won't have money to save in the bank."

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