Over the past four years, business investment—particularly in industrial development and property—has become the engine driving China's economy. During this period, such investments, reflecting the country's determination to clear a backlog of much-needed infrastructure and housing projects, accounted for more than 40 percent of GDP growth. By contrast, consumer spending accounted for some 33 percent of GDP growth, down from 45 percent in the 1990s. This comparative weakness in consumer spending is creating a potential stumbling block for the economy.

To sustain rapid economic growth, the Chinese government will have to encourage consumers—especially the 250 million with household incomes of more than $1,000 a year and the 50 million with more than $3,500 a year—to spend more of their hard-earned cash. The good news is that Chinese consumers do have money to spend, having accumulated well over $1 trillion in savings. However, they are showing little sign of losing their caution, with the savings rate climbing to 44 percent of GDP last year, as opposed to 26 percent in Taiwan and 32 percent in South Korea. In big cities, such as Beijing and Shanghai, savings rates are as high as 50 percent, reflecting the consumers' propensity to save a...