Though consumption strengthened throughout 2006 we remain cautious on the outlook and do not expect a tidal wave of consumer spending to come rolling in any time soon, as many are forecasting.

We are increasingly concerned by the growing use of the term "middle class" in analysis of household spending in China. It is a term that has little relevance to the Chinese economy and the social model implied by it simply does not exist in China. Most spending in China is very different from spending in developed countries - the bulk of consumer spending is just above subsistence spending. The median income in the rich coastal provinces is $5,000, whereas outside Shanghai and Beijing the median household income is closer to $3,000, and just $1,500 per family for all of China.

Given the extraordinarily high level of savings, it should come as no surprise that the bulk of spending is subsistence spending. The rapid development of an affluent middle class still remains a long way away. The median household income of $45,000 in the US, which underpins the US consumer, would represent an extraordinary degree of wealth in China.

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Moreover, one of the major drivers of consumption in developed economies has been the ability of households to finance consumption through credit, or debt. This is a dynamic that is simply not present in the Chinese economy. Whereas the US consumer is able to spend more than his or her income through the use of sophisticated credit markets, this institutional framework has not developed in China.

Even if it were available it is questionable how many households would actually avail themselves of debt. Chinese households save nearly 40 percent of their income, given the lack of a government-funded social security net. The creation of a deep social security net will take decades to develop and will largely have to be funded by higher personal tax payments.

China's vast population will one day represent a vast consumer base. At this time, however, the number of people on incomes high enough to be able to afford anything other than subsistence spending is quite small.

It could well be that the Chinese policymakers continue to strike the correct policy balance and the net effect on both the Chinese economy and the global economy is a continuation of the Goldilocks Effect. That is, not too hot, not too cold, just right.