Description
The report about China’s current development model and growth path is analyzed and the reasons that the economy would benefit from an increased share of private domestic consumption is identified.
Unleashing Chinese Consumption Pattern
Riddhi Mehta Roll No 130 MMS – B 3/23/2010
Table of Contents
China under consumes its level of wealth ............................................................................................... 5 Why China Under-consumes? ................................................................................................................ 8 Consumption and Consumerism ........................................................................................................... 10 What does increase in consumption mean for China and rest of the world? .................................... 11 How can China Increase consumption? ................................................................................................ 12 Conclusion ............................................................................................................................................ 15 Sources: ................................................................................................................................................. 16
2
Executive Summary
China is on course to become the world’s third-largest consumer market by 2020. Although private consumption constitutes a remarkably low share of china’s economy, whose rapid growth in recent years has come on the back of a Development model that has rested heavily on industrial development and exports. Even before the global financial crises buffeted china and proved its vulnerability to a downturn in the key export markets, the political leadership of People’s Republic had set itself a new aim of rebalancing its economic mix and boosting the consumption share of the economy. If China succeeds in this aim it will not only boost jobs but also its income, GDP and insulate the economy from volatility imported from outside. China’s investment-led model has skewed the economy toward industry and has made corporate investment too cheap, leading to inefficient investment in excess capacity. Reliance on exports has left China exposed to a downturn in its exports to major markets over the globe. As the global fallout of the US financial crises has put new strain on the China’s current development, the case for shifting towards a stronger reliance on the domestic consumer spending has gathered force. In March 2007, Chine se Premier Wen Jiabao surprised outside experts at an important annual planning forum by confessing that he feared that Chinese economy suffered from “structural” problems resulting in development that was ”unstable, unsteady, unbalanced and uncoordinated” Indeed the Chinese leadership made promotion of Domestic consumption a critical pillar in the drive to sustain economic growth in the long term- a strategic shift that will have consequence not only in on the Chinese economy but that of the global markets. In tandem with this short term stimulus package to the help the economy weather over inflation the government of China has already embarked on many aspects of this shift, including reforms to healthcare, education and pension system. Private consumption in China accounts for 36% share of GDP the lowest percentage of any major economy in the world, reflecting China’s reliance thus far on a giant investment machine that crowds out consumption. Even at its low during World War II when consumption dropped in favour of massive industrialization to support the war effort, the US consumption share of GDP never dipped below around the 50 percent mark. Looking at major Asian economies today, Japan’s consumption share stands at 55 percent and South Korea’s at 48% the shares in two relatively consumption-heavy Western economies United States and the United Kingdom—is 71 and 67 percent, respectively. While there is no optimal level for the share of consumption in an economy some might argue that that a consumption share of around 70 percent is as unbalanced as China's 36 per cent—a share closer to 50 percent would bring China in line with its peers in Asia today. In the following report, China’s current development model and growth path is analysed and the reasons that the economy would benefit from an increased share of private domestic consumption is identified. In next part of the report the drivers of China’s lagging consumption share is identified, 3
enabling us to describe how China got to be where it is today. In the concluding portion, potential policies —many of which the government is already pursuing to some degree—that would help shift the economy toward a more consumption-oriented growth model are described. A set of broad groups of policies that could help China raise its consumption over the next 50 years are: Expanding the availability and improving the quality of products Increasing the availability and up take of consumer credit. Currently it is very low as compared to other countries across the globe. An improved social safety net would boost retirement and health care spending. Other structural reforms to boost household incomes, particularly incomes from investments. This group of policies would include a wide ranging set of measures affecting the financial system, industrial policy, international trade and many other aspects of china’s political economy. Encouraging financial-sector liberalization. China could boost non-wage sources of income by reforming the dividend policy for state-owned enterprises and encouraging the creation of a wider array of financial instruments to enable greater household participation in financial markets. Aggressively pursuing greater investment efficiency and consolidation in the industry to boost productivity. Scaling back the government’s direct and indirect subsidies designed to bolster industry's growth—for example, by adjusting tariffs or by encouraging more commercially based lending decisions could promote higher efficiency in both the investment and consumption of resources.
4
China under consumes its level of wealth
China has recently overtaken Germany to become the world’s third-largest economy behind the United States and Japan, but it punches well below its weight in terms of consumer spending, coming in a distant fifth behind the United States, Japan, the United Kingdom, and Germany. O n current trends, China’s consumption is expected to grow by more than an 8 percent compound annual rate over the next 15 years, making China the world’s third-largest consumer market by 2020.
But the fact is—and will remain the case on current trends and policies—that China today vastly under consumes given the size of its economy. Per capita private consumption stood at less than 5,600 renminbi in 2007 lower not only than levels prevailing in the world’s developed economies but also those in many developing countries, including in Asia.
5
Moreover, the share of Chinese GDP accounted for by consumption ha s fallen dramatically since the mid-1980s and, if current trends hold, will not rebound substantially over the next 15 years, with the consumption share of GDP anticipated to rise only slightly from 36 percent today to around 39 percent in 2025. This level makes it second-lowest among G-20 countries. Only Saudi Arabia, where massive
General Index Country or Region 2005 2006 2007 2005 2006 2007 of Which: Food
China Bangladesh? India? Japan United Kingdom
106.9 126.7 121.5 97.8 112.7
108.5 135.3 131.9 98.1 116.3 116.8
113.7
116.3 127.8
119.0 137.5 124.7 98.9 109.6 115.2
133.8
136.0 98.1 121.3 119.6
115.0 98.4 107.3 112.2
137.0
119.5 99.2
New Zealand 113.0 Source: United Nations Database .
oil-related net exports take share away from private consumption, has a lower share of consumption.
The soaring inflation is also eating into China’s propensity to consume and is thus having a compensatory effect on the other emerging economies. If by 2030 China and India alone were to achieve a per-capita [resource consumption] footprint equivalent to that of Japan today, together they would require a full planet Earth to meet their needs. China spends
6
almost 45% of the household income on food and India spends about 50%. The Chinese households consume less than 40% of their GNP with the ratio having been declined by 10 percentage points over the year’s since1980s (as per IMF report). As of March 2010 it is only 37% of the GDP. At the same time, there has been a steady increase in the shares of domestic investment and net exports. While it is not surprising that consumption share declined in the early stages of China’s development, as is typically the case in the initial stages of development when investment is the main driver of growth, what is striking is the extent of such a decline.
Overall, the increase in the household savings rate accounts for about 9 percentage points of the approximately 13 percentage points of GDP decline in the household consumption ratio between 1990 and 2007. The rest can be explained by the fall in the share of household disposable income in GDP over the same period.
7
Why China Under-consumes?
Despite China’s remarkably high growth, the share of consumption in total expenditure has been low and declining due to: High and rising saving rate of Chinese households as uncertainty over provision of pensions, and healthcare and education costs have increased since the mid-1990s China’s relatively limited public social-safety net—in particular, health care and pensions— may be causing precautionary “excessive” savings. In recent years, China’s social-safety net has not expanded sufficiently to keep pace with the increasing cost of paying for health care, retirement, unemployment benefits, and other basic social services for the country’s citizens. In the face of uncertainty around these types of expenses and their ability to pay for them, and in the absence of strong public or private forms of insurance, consumers self-insure by saving out of their disposable incomes. According to the system operated by the SOEs, the “work unit” was responsible for the social and economic welfare of workers and their families. After the reform of the SOEs, the burden of health and education expenditures essentially shifted to the private sector, thus effectively reducing households’ lifetime incomes (as income in kind was lowered by the reforms), and also leading to a perception of higher income and expenditure risk. The increased risk faced by households of incurring significant health or education expenditures is thus likely to have played a role in the rise in the savings rate. Weak Wage growth Weak wage growth reflects a variety of factors: high internal migration from rural to urban areas has maintained a high supply of labour which outstrips the increase in demand, resulting in a sizeable under- or unemployed share of labour. This is combined with the absence of effective union organizations and some degree of monopsonistic power in the hands of employers. Elevated private cost of higher education Decline in household’s share of Income as a percentage of GDP Weak corporate governance and minority shareholding rights have allowed firms to accumulate profit instead of distributing dividends.
8
State O Owned Ente erprises no ot paying dividend to governm mentthis lea to a fall in investm ads l ment income e
27.4 27.2 27.0 26.8
73.8 73.6 73.4 73.2
The gov vernment st retains till 26.6 73.0 Gov vernme conside erable owne ership of the e nt S Savings 26.4 72.8 corpora sector. In most coun ate n ntries, Hou usehold this has been a con s nduit of indi irectly 26.2 72.6 Sav vings transfer rring corpor profit to rate o 26.0 72.4 househo olds. State-o owned enterprises 25.8 72.2 (SOEs) pay dividen to the nds governm ment, which uses the fu h unds to provide goods such as educati and e h ion health t are esse that entially priv vate goods, a welfare payments. In China, S and e SOEs do no pay divide ot ends to the g government such t, that this conduit of profit trans has bee closed. s f sfer en Interes rates bein capped b the gove st ng by ernment Bank de eposits are t main ve the ehicle of sav vings of Chi inese house eholds. How wever, the in nterest rate on household d deposits has been capp by the government. Consequen s ped g . ntly, the sha of are interest earnings ha declined over the ye as ears. China’s banks hav of course enjoyed higher ve, e, h interest rate margin Howeve with muc of the ban ns. er, ch nking secto burdened with high nonor, d n perform ming loans, u under-capit talized, and under-prov visioned until only last y year, the higher interest margin has for all pra s, actical purpo oses, ended up as being “transfers” from hous d g seholds orations. Fo these reas or sons and un nlike in man other cou ny untries, the r in corpo rise orate to corpo profits d not tran did nslate into hi igher house ehold incom in China. me China’s consumer make lim rs mited use of credit, ins stead save up in advance of larg ge outlays they do no have suff s ot fficient cash h % hina’s outst tanding consumer credi falls below that of ot it w ther Asian At 13% of GDP Ch countrie like Sout Korea at 70% and M es th Malaysia at48%
Chinese investment and industr intensive model crow out cons e t ry wds sumption China’s investment-led, industr ry-cantered growth and its empha d asis on exp ports have favoured corporat tions and cro owded out consumption. Chinese com mpanies, a l large propor rtion of wh hich are SOE s , have been e extremely pr rofitable in r recent years, given strong domestic demand and a robust g d export m market that ha s grown ra apidly since China’s acc cession to th WTO in 2 he 2001. As a re esult, it is no surpr that the corporate se rise ector contribu uted more to cumulative national sav o vings growth than all h other sec ctors of the e economy.
2001 2002 2003 2004 2005 2006 2007
Ineffici ient and shallow finan ncial marke ets A huge amount of China’s ca e f apital is in the hands of Big 4 ba o anks. Althou the pur ugh rpose of creating these ban was to support SOEs, prefe g nks erential lend ding to larg and established ge players is still prev valent. Although SMEs constitute a larger sha of the economic ac s are ctivity in China, they garne a smaller share of credit due to China’s persistent industry focussed er r s t f al This has led to drive u non cons d up sumption sh hare of GDP by contin nuing to financia sector. T
9
incentivise growth in capital intensive industries that do not generate the same amount of income and employment growth as SMEs and service sector does. In short the corporate sector dominates savings and national income. In 2007 corporate account for 47% of growth in national savings, households contribute 30% and balance is by government.
Consumption and Consumerism
A culture in which the urge to consume dominates the psychology of citizens is a culture in which people will do most anything to acquire the means to consume–working slavish hours, behaving rapaciously in their business pursuits, and even bending the rules in order to maximize their earnings. They will also buy homes beyond their means and think nothing of running up credit-card debt. It therefore seems safe to say that consumerism is, as much as anything else, responsible for the current economic mess.
What needs to be eradicated, or at least greatly tempered, is consumerism: the obsession with acquisition that has become the organizing principle of American life. This is not the same thing as capitalism, nor is it the same thing as consumption. To explain the difference, it is useful to draw on Abraham Maslow’s hierarchy of human needs. At the bottom of this hierarchy are basic creature comforts; once these are sated, more satisfaction is drawn from affection, self-esteem, and, finally, self-actualization. As long as consumption is focused on satisfying basic human needs–safety, shelter, food, clothing, health care, education–it is not consumerism. But, when the acquisition of goods and services is used to satisfy the higher needs, consumption turns into consumerism–and consumerism becomes a social disease.
While countries around the world are benefiting from low-cost Chinese manufacturing, China is also providing – through both production and imports. The growing culture of consumption and consumerism in traditionally frugal China has serious environmental impacts. As per The World watch Institute’s State of the World 2004 report, “One quarter of humanity—1.7 billion people worldwide—now belong to the ‘global consumer class,’ having adopting the diets, transportation systems and lifestyles that were once mostly limited to the rich nations of Europe, North America and Japan.” While China and other developing countries are home to growing numbers of such consumers (particularly in large urban centres), however, disparities remain “as 2.8 billion people on the planet struggle to survive on less than $2 a day, and more than one billion people lack reasonable access to safe drinking water.” Internationally known brands of clothing and other products abound in China’s biggest cities (particularly Beijing and Shanghai), along with an increasing number of western restaurant and coffee-shop franchises. Consumerism has been termed the new “ism” in China, linking happiness to material goods and helping to drive the economy.
10
Hand in hand with consumerism is consumption, which in some cases means the using up of a resource. China’s goal of achieving a first-world lifestyle for its people wills double the world’s human-resource use. China’s current growth model is notable for its impact on the environment. The country is one of the world’s greatest producers of greenhouse gases and is the world’s largest coal consumer. Consumption patterns have definite ecological implications. Growing economic prosperity and consumer markets make the spending patterns of Chinese consumers an important site for extended Inquiry. Steps toward ecological sustainability can be achieved with a better understanding of what structures the consumption demands of the Chinese population. Direct effects on greenhouse emissions can be seen emerging from several locations. Increasing home sizes as well as increases in the amount of appliances and IT products being used mean more coal-fired power plant construction and higher levels of greenhouse gas emissions. In addition, the increase in landfills and biomass burning from growing disposal of goods has increased CH4 emissions. The energy intensity (energy use per unit of output) is some foursix times that of advanced countries if measured in current dollars. The changing pattern in energy use is resulting in steeply rising consumption of fuels and increasing imports of petroleum, and with it a rising concern on energy security. Reliance On coal for 71 percent of the total energy consumed and the rapid spread of motorization is intensifying air pollution and is contributing to greenhouse gas emissions. Previous MGI research on China’s energy productivity opportunity has identified China’s industry mix as a key driver of its resource intensity. Consumer-related and service sectors tend to be more efficient users of resources than heavy industry; therefore, a rebalancing of China’s growth away from industry and toward “ softer” sectors such as services and consumer would help boost the country’s already-commendable efforts to put the economy on a more environmentally sustainable footing.
What does increase in consumption mean for China and rest of the world?
The government has taken steps to initiate the transition to a more consumption driven growth path. For example: Outlays on social programs increased more rapidly, particularly in 2005-2007, which should contribute overtime to a reduction in precautionary savings by the households. Raising domestic consumption will have 2 effects: • Absorbing production capacity that China’s economy would otherwise channel into exports • Increase household spending which is likely to generate higher imports. Together these two effects will help narrow China’s trade surplus. This, in turn, will diminish the need for China to build and maintain foreign reserve assets, a position its leadership views as increasingly risky but must nonetheless accept as a necessary consequence of running large trade surpluses while maintaining tight capital controls. Although boosting the consumption share alone will not be sufficient to correct global imbalances, such a shift could make a contribution that would alter the tenor of international financial discussions on topics such as the security of China’s holdings of foreign assets and the valuation of the renminbi, both sources of contention in the global arena that have arisen because of China’s large trade imbalances.
11
Increase in Chinese consumption will help the economy insulate itself from the decline in demand for Chinese goods from the US and other global markets. Between January, 2009 and September 2009, China's exports fell by 21.3 percent compared with the same period in 2008. The country's total trade with the European Union dropped 19.4 percent while trade with the US and Japan declined 15.8 percent and 20 percent respectively, according to the General Administration of Customs. A breath taking fall in exports led to an investment downturn. An estimated 20 million workers lost their jobs in a short span. Higher domestic consumption will make the economy more resilient to external shocks during period of crises.
The reason underlying the leadership decision to rebalance the sources of growth is the desire to increase personal consumption and alleviate or at least slow the pace of increasing income inequality. In 2005 personal consumption in China was 30 percent less in real terms than the level that would have been achieved if the household consumption share of GDP had remained at the 1990 level rather than falling by more than 10 percentage points. India offers a useful comparison. In 2004 China’s per capita GDP was two-and-a-half times that of India. But, because house- hold consumption as a share of GDP was so much lower in China, per capita consumption exceeded that in India by only two-thirds. The ultimate purpose of economic growth everywhere is to improve human welfare. By this standard, China is falling far below potential.
Chinese consumption has to be different from that of the world. The consumption should necessarily increase incrementally and not drastically. This is because of the global interdependencies that China has with rest of the world. If China increases consumption drastically its exports shall reduce, its foreign currency reserves shall be affected and China will not have sufficient money to buy US T-bonds. Both however cannot be done simultaneously. Moreover different nations have different cultures, and the demographics are also different. The Chinese population is rapidly aging. That makes it necessary for them to save. As long as China gets rid of some of the structural failures or institutional problems that suppress consumption it are fair to have a considerable amount of savings.
How can China Increase consumption?
Sustainability of China’s growth has moved centre stage. After three decades of Exceptionally rapid growth, the sustainability of growth in terms of environment, social Stability, and even GDP growth itself is being widely debated. This group of policies comprises
a range of relatively short-term initiatives focused on creating a more comprehensive “consumption infrastructure” that would make it easier f o r Chine se c citizen s to purchase a wider range o f products and services than are available to many Chinese today. Some of these changes would require that consumers save less of their disposable incomes, while others would allow them to consume sooner through the use of consumer credit. There are two major policy thrusts for China to consider: Expanding the availability and improving the quality of products Today, there is a huge gulf between the retail and consumer experience available in China’s larger and wealthier cities and that in smaller cities and rural areas. Actions might include supporting the development of modern store formats, channels, and distribution networks (e.g., second-hand and leasing markets for cars, online shopping for many categories) and encouraging the continued 12
ment of bo oth international and domestic players throu ughout the consumer industry. developm
Compo osition o of GDP o of China a
120.0 1 100.0 1 80.0 60.0 40.0 20.0 0.0 1 2001 2002 2003 2004 2005 2006 2007 Agriculture Industry Construct tion Services
Source: Bureau of st tatistics of Ch hina
Increasi the avail ing lability and uptake of co onsumer cre edit The ava ailability and use o f con d nsumer credi is currentl low in C henna in co it ly omparison with other w countries, even those within Asi at similar development levels. Mea e ia asures to inc crease the av vailability of cred an d to encourage consumers to increase th use of c dit heir credit as a m means of res sponsibly financin home purc ng chases, educa ation, and a broader set of consumpti needs wo o ion ould allow co onsumers to borrow against fut w ture income to make big-ticket purch hases that wo ould increase their quality y of life y today. If pursued wi f isely, this wo ould contribu to a poten ute ntial boost in consumptio share of 1.5 to 3.4 n on 1 percenta points an ultimately help generat more weal for Chines household in the future. age nd te lth se ds
An imp proved soci Safety n would b ial net boost health care and r h retirement spending
Improvin the social-safety net p provided b the g gov ng by vernment w ill r educe p precautiona overary savings , increase e total spen nding on h health care and retire e ement, and cause discretionary consume spending to rise. But improving China’s soci er ial-safety ne is a critica step forwa for a et al ard number of reasons t that go beyo merely b ond boosting con nsumption. G Greater public provision will help c w guard ag gainst the pot tential for social al instab bility that ma result from the inequiti engendere by the ay m ies ed rapid economic grow and urba wth anization tha China is ex at xperiencing today. In addition, highe quality er care and pen nsions will fo foster lab o r p rod acti rivity gains o over the long g term and further g health c improve China’s gro e owth prospects. Underta aking structural reform would incr ms rease househ hold income e Shifting toward ser g rvices China’s political lea adership reco ognizes that shifting inv vestment to m more efficien and labou rather nt urthan cap pital-intensive service sec e ctors would h have a multip plier effect on employme economic growth, n ent, c and cons sumption. ing ent-related s sources of h household inc come Improvi investme At less t than 2 percen of average household i nt e income, investment-relate sources of income in China are ed f C low com mpared with other count tries; and the sources have not been increasin as a share of total ese ng e 13
income. Today, the real return n on financial assets in China is only 0.5 percent, compared with 1.8 percent in South Korea and 3.1 percent in the United States. Although improving returns on household assets over the long-term would require significant changes in China’s financial system, much progress is possible simply by giving high-saving households access to a greater r array of fine uncial products and services such as mutual funds, fixed-income products, annuities, CDs, and so on.
Revaluation of Chinese Currency
Undervalued RMB distorts international trade is because it transfers income from Chinese households (they have to pay more for imports) and subsidizes Chinese manufacturers in the tradable goods sector. This is one of the many mechanisms by which households are forced to subsidize production and investment. A revaluation shifts wealth from the Chinese government and the manufacturing sectors to Chinese households. It helps to reduce subsidies to manufacturers and returns the income to Chinese households, who can then increase their relative consumption. This will shift resources to households and away from producers, infrastructure investment, and real estate developers. This allows household income to grow relative to national income, which ultimately increases the consumption share of GDP.
Expansion of the coverage, reliability and efficiency of pension system
China’s pension system is still in a period of transition away from the “iron rice bowl” regime toward a system that provides benefits and oversees administration through governmental organizations rather than employers. The system faces a number of challenges, and we identify three broad sets of policies that could help to meet them. The government is already implementing so many of these policies but has thus far not focused serious attention on others.
Approximately 40-50% of Chinese workers have some form of pension coverage in different schemes providing for urban residents, rural citizens and civil servants. A) Centralizing administration and funds pooling
When China first recalibrated the pension system after its deregulation of SOEs, pension plans were administered at the municipal level; each city managed collections, pooled funds, and oversaw payouts to retired residents holding a hukou in that city. However, migration dramatically increased, this system came under severe strain. • Migrants have lost confidence in the system because they may have had to pay into the pension system in the city in which they work but do not receive coverage because they lack a hukou Cities have been unable to meet their pension obligations because they have had no access to a national pool of pension funding—i.e., even if another city has a surplus, it is not available because there is no national system. • Each municipality has its own burden of administrative overheads and bureaucracy, leading to scale inefficiencies. B) Closing the financing gap. The system currently faces a gap of 65% to 94% of GDP, according to World Bank. This is because of: • Low retirement age • Increasing life expectancy • Low collection rates (estimated at 70%) • Rapidly aging population • Low rate of return on funds which have traditionally been deposited in 1 yr deposit notes. Because of these there is a mourning urgency of financing factors. Encouraging financial-sector liberalization 14
China could boost non-wage sources of income by reforming the dividend policy for state-owned enterprises (SOEs) and encouraging the creation of a wider array of financial instruments to enable greater household participation in financial markets. Taken together, action on these fronts would encourage firms to make more judicious investment decisions and allow households to share in the profits generated by those firms, reaping dividends and realizing higher returns on their assets over time. This would help to reallocate capital toward private citizens or service sectors. China is already actively engaged in financial-system reforms, but the reform program is behind schedule and, in any case, China should consider broadening the scope of its plans for banking and capital market liberalization and development as part of its aim of shifting toward a higher consumption share.
Boosting growth of SMEs The growth of service sector is likely to hinge on the successful development of SMEs. Today these companies face a number of barriers to market entry (similar to their counterparts in developing countries) .Reform of business licensing procedures, more supportive
labour market policies, and easier credit access are necessary if service-sector SMEs are to increase their s h are of C china’s economic activity.
Conclusion
Inspire of continued efforts of China to increase its consumption and shift the economy towards a more consumer centric direction there has been a gap between realty and actual impact. . Take as illustration the 4 trillion renminbi government stimulus package that C china began
to implement in the winter of 2008. The package focuses heavily on funding for new highways and rail systems. Indeed, 89 percent of the entire package is devoted to infrastructure investment and only 8 percent to supporting consumption (the rest goes to bolstering corporate performance). Although shortterm support is necessary in the turbulent current economic conditions, China will need to look at longterm policies as well. China’s growth model has a great deal of momentum, and change will not come easily. Major shifts away from the current economic mix by 2025 will entail very difficult choices. As long as China’s economic structure remains so heavily weighted toward investment, that component of the economy will continue to grow. In other word, the government’s goal of boosting g the s h are of consumption will meet t with a strong headwind. Moreover, some of the policies that have the potential to e be effective in boosting the c consumption share of the economy are long term in nature—notably, improvements to China’s social-safety net may not contribute a great deal to the rebalancing toward consumption in a 15-year time horizon. Yet China has achieved enormous economic strides with a speed that has barely been replicated elsewhere in the world in recent history, and it is conceivable that China could take aggressive concerted action on the policy fronts described in this report. Moreover, the current economic climate makes a move away from net exports imperative. If the consumption share rises from today’s 36 percent to between 45 and 50 China would increase
another 10-15% of its GDP. The composition of the economy would show a marked shift, i.e. government spending would increase, service industry would boost, number of jobs would increase and so on. As per McKinsey, China’s share of world consumption would increase between 11 and 13% in 2025 up from 9% that we project from current trend and unchanged policy. This would mean that China would account for more than one-quarter of all new
consumption worldwide over the n ex t 15 y ears , adding more than ten percentage points to global 15
consumer demand growth in the process . For China, the prize of successfully engineering a shift to a new growth paradigm will be an economy that is less vulnerable to ill winds blowing in from overseas, has higher levels of efficiency and higher household incomes, and has a new maturity. By sizing the potential available from initiatives in different policy areas, this study seeks to illuminate some of the priorities that China might set if it is to vault the economy into a new, dynamic phase of its evolution.
Sources:
http://www.imf.org/external/pubs/ft/wp/2010/wp1069.pdf http://www.stats.gov.cn/english/statisticaldata/yearlydata/ http://www.mckinsey.com/locations/india/mckinseyonindia/
16
doc_115725910.pdf
The report about China’s current development model and growth path is analyzed and the reasons that the economy would benefit from an increased share of private domestic consumption is identified.
Unleashing Chinese Consumption Pattern
Riddhi Mehta Roll No 130 MMS – B 3/23/2010
Table of Contents
China under consumes its level of wealth ............................................................................................... 5 Why China Under-consumes? ................................................................................................................ 8 Consumption and Consumerism ........................................................................................................... 10 What does increase in consumption mean for China and rest of the world? .................................... 11 How can China Increase consumption? ................................................................................................ 12 Conclusion ............................................................................................................................................ 15 Sources: ................................................................................................................................................. 16
2
Executive Summary
China is on course to become the world’s third-largest consumer market by 2020. Although private consumption constitutes a remarkably low share of china’s economy, whose rapid growth in recent years has come on the back of a Development model that has rested heavily on industrial development and exports. Even before the global financial crises buffeted china and proved its vulnerability to a downturn in the key export markets, the political leadership of People’s Republic had set itself a new aim of rebalancing its economic mix and boosting the consumption share of the economy. If China succeeds in this aim it will not only boost jobs but also its income, GDP and insulate the economy from volatility imported from outside. China’s investment-led model has skewed the economy toward industry and has made corporate investment too cheap, leading to inefficient investment in excess capacity. Reliance on exports has left China exposed to a downturn in its exports to major markets over the globe. As the global fallout of the US financial crises has put new strain on the China’s current development, the case for shifting towards a stronger reliance on the domestic consumer spending has gathered force. In March 2007, Chine se Premier Wen Jiabao surprised outside experts at an important annual planning forum by confessing that he feared that Chinese economy suffered from “structural” problems resulting in development that was ”unstable, unsteady, unbalanced and uncoordinated” Indeed the Chinese leadership made promotion of Domestic consumption a critical pillar in the drive to sustain economic growth in the long term- a strategic shift that will have consequence not only in on the Chinese economy but that of the global markets. In tandem with this short term stimulus package to the help the economy weather over inflation the government of China has already embarked on many aspects of this shift, including reforms to healthcare, education and pension system. Private consumption in China accounts for 36% share of GDP the lowest percentage of any major economy in the world, reflecting China’s reliance thus far on a giant investment machine that crowds out consumption. Even at its low during World War II when consumption dropped in favour of massive industrialization to support the war effort, the US consumption share of GDP never dipped below around the 50 percent mark. Looking at major Asian economies today, Japan’s consumption share stands at 55 percent and South Korea’s at 48% the shares in two relatively consumption-heavy Western economies United States and the United Kingdom—is 71 and 67 percent, respectively. While there is no optimal level for the share of consumption in an economy some might argue that that a consumption share of around 70 percent is as unbalanced as China's 36 per cent—a share closer to 50 percent would bring China in line with its peers in Asia today. In the following report, China’s current development model and growth path is analysed and the reasons that the economy would benefit from an increased share of private domestic consumption is identified. In next part of the report the drivers of China’s lagging consumption share is identified, 3
enabling us to describe how China got to be where it is today. In the concluding portion, potential policies —many of which the government is already pursuing to some degree—that would help shift the economy toward a more consumption-oriented growth model are described. A set of broad groups of policies that could help China raise its consumption over the next 50 years are: Expanding the availability and improving the quality of products Increasing the availability and up take of consumer credit. Currently it is very low as compared to other countries across the globe. An improved social safety net would boost retirement and health care spending. Other structural reforms to boost household incomes, particularly incomes from investments. This group of policies would include a wide ranging set of measures affecting the financial system, industrial policy, international trade and many other aspects of china’s political economy. Encouraging financial-sector liberalization. China could boost non-wage sources of income by reforming the dividend policy for state-owned enterprises and encouraging the creation of a wider array of financial instruments to enable greater household participation in financial markets. Aggressively pursuing greater investment efficiency and consolidation in the industry to boost productivity. Scaling back the government’s direct and indirect subsidies designed to bolster industry's growth—for example, by adjusting tariffs or by encouraging more commercially based lending decisions could promote higher efficiency in both the investment and consumption of resources.
4
China under consumes its level of wealth
China has recently overtaken Germany to become the world’s third-largest economy behind the United States and Japan, but it punches well below its weight in terms of consumer spending, coming in a distant fifth behind the United States, Japan, the United Kingdom, and Germany. O n current trends, China’s consumption is expected to grow by more than an 8 percent compound annual rate over the next 15 years, making China the world’s third-largest consumer market by 2020.
But the fact is—and will remain the case on current trends and policies—that China today vastly under consumes given the size of its economy. Per capita private consumption stood at less than 5,600 renminbi in 2007 lower not only than levels prevailing in the world’s developed economies but also those in many developing countries, including in Asia.
5
Moreover, the share of Chinese GDP accounted for by consumption ha s fallen dramatically since the mid-1980s and, if current trends hold, will not rebound substantially over the next 15 years, with the consumption share of GDP anticipated to rise only slightly from 36 percent today to around 39 percent in 2025. This level makes it second-lowest among G-20 countries. Only Saudi Arabia, where massive
General Index Country or Region 2005 2006 2007 2005 2006 2007 of Which: Food
China Bangladesh? India? Japan United Kingdom
106.9 126.7 121.5 97.8 112.7
108.5 135.3 131.9 98.1 116.3 116.8
113.7
116.3 127.8
119.0 137.5 124.7 98.9 109.6 115.2
133.8
136.0 98.1 121.3 119.6
115.0 98.4 107.3 112.2
137.0
119.5 99.2
New Zealand 113.0 Source: United Nations Database .
oil-related net exports take share away from private consumption, has a lower share of consumption.
The soaring inflation is also eating into China’s propensity to consume and is thus having a compensatory effect on the other emerging economies. If by 2030 China and India alone were to achieve a per-capita [resource consumption] footprint equivalent to that of Japan today, together they would require a full planet Earth to meet their needs. China spends
6
almost 45% of the household income on food and India spends about 50%. The Chinese households consume less than 40% of their GNP with the ratio having been declined by 10 percentage points over the year’s since1980s (as per IMF report). As of March 2010 it is only 37% of the GDP. At the same time, there has been a steady increase in the shares of domestic investment and net exports. While it is not surprising that consumption share declined in the early stages of China’s development, as is typically the case in the initial stages of development when investment is the main driver of growth, what is striking is the extent of such a decline.
Overall, the increase in the household savings rate accounts for about 9 percentage points of the approximately 13 percentage points of GDP decline in the household consumption ratio between 1990 and 2007. The rest can be explained by the fall in the share of household disposable income in GDP over the same period.
7
Why China Under-consumes?
Despite China’s remarkably high growth, the share of consumption in total expenditure has been low and declining due to: High and rising saving rate of Chinese households as uncertainty over provision of pensions, and healthcare and education costs have increased since the mid-1990s China’s relatively limited public social-safety net—in particular, health care and pensions— may be causing precautionary “excessive” savings. In recent years, China’s social-safety net has not expanded sufficiently to keep pace with the increasing cost of paying for health care, retirement, unemployment benefits, and other basic social services for the country’s citizens. In the face of uncertainty around these types of expenses and their ability to pay for them, and in the absence of strong public or private forms of insurance, consumers self-insure by saving out of their disposable incomes. According to the system operated by the SOEs, the “work unit” was responsible for the social and economic welfare of workers and their families. After the reform of the SOEs, the burden of health and education expenditures essentially shifted to the private sector, thus effectively reducing households’ lifetime incomes (as income in kind was lowered by the reforms), and also leading to a perception of higher income and expenditure risk. The increased risk faced by households of incurring significant health or education expenditures is thus likely to have played a role in the rise in the savings rate. Weak Wage growth Weak wage growth reflects a variety of factors: high internal migration from rural to urban areas has maintained a high supply of labour which outstrips the increase in demand, resulting in a sizeable under- or unemployed share of labour. This is combined with the absence of effective union organizations and some degree of monopsonistic power in the hands of employers. Elevated private cost of higher education Decline in household’s share of Income as a percentage of GDP Weak corporate governance and minority shareholding rights have allowed firms to accumulate profit instead of distributing dividends.
8
State O Owned Ente erprises no ot paying dividend to governm mentthis lea to a fall in investm ads l ment income e
27.4 27.2 27.0 26.8
73.8 73.6 73.4 73.2
The gov vernment st retains till 26.6 73.0 Gov vernme conside erable owne ership of the e nt S Savings 26.4 72.8 corpora sector. In most coun ate n ntries, Hou usehold this has been a con s nduit of indi irectly 26.2 72.6 Sav vings transfer rring corpor profit to rate o 26.0 72.4 househo olds. State-o owned enterprises 25.8 72.2 (SOEs) pay dividen to the nds governm ment, which uses the fu h unds to provide goods such as educati and e h ion health t are esse that entially priv vate goods, a welfare payments. In China, S and e SOEs do no pay divide ot ends to the g government such t, that this conduit of profit trans has bee closed. s f sfer en Interes rates bein capped b the gove st ng by ernment Bank de eposits are t main ve the ehicle of sav vings of Chi inese house eholds. How wever, the in nterest rate on household d deposits has been capp by the government. Consequen s ped g . ntly, the sha of are interest earnings ha declined over the ye as ears. China’s banks hav of course enjoyed higher ve, e, h interest rate margin Howeve with muc of the ban ns. er, ch nking secto burdened with high nonor, d n perform ming loans, u under-capit talized, and under-prov visioned until only last y year, the higher interest margin has for all pra s, actical purpo oses, ended up as being “transfers” from hous d g seholds orations. Fo these reas or sons and un nlike in man other cou ny untries, the r in corpo rise orate to corpo profits d not tran did nslate into hi igher house ehold incom in China. me China’s consumer make lim rs mited use of credit, ins stead save up in advance of larg ge outlays they do no have suff s ot fficient cash h % hina’s outst tanding consumer credi falls below that of ot it w ther Asian At 13% of GDP Ch countrie like Sout Korea at 70% and M es th Malaysia at48%
Chinese investment and industr intensive model crow out cons e t ry wds sumption China’s investment-led, industr ry-cantered growth and its empha d asis on exp ports have favoured corporat tions and cro owded out consumption. Chinese com mpanies, a l large propor rtion of wh hich are SOE s , have been e extremely pr rofitable in r recent years, given strong domestic demand and a robust g d export m market that ha s grown ra apidly since China’s acc cession to th WTO in 2 he 2001. As a re esult, it is no surpr that the corporate se rise ector contribu uted more to cumulative national sav o vings growth than all h other sec ctors of the e economy.
2001 2002 2003 2004 2005 2006 2007
Ineffici ient and shallow finan ncial marke ets A huge amount of China’s ca e f apital is in the hands of Big 4 ba o anks. Althou the pur ugh rpose of creating these ban was to support SOEs, prefe g nks erential lend ding to larg and established ge players is still prev valent. Although SMEs constitute a larger sha of the economic ac s are ctivity in China, they garne a smaller share of credit due to China’s persistent industry focussed er r s t f al This has led to drive u non cons d up sumption sh hare of GDP by contin nuing to financia sector. T
9
incentivise growth in capital intensive industries that do not generate the same amount of income and employment growth as SMEs and service sector does. In short the corporate sector dominates savings and national income. In 2007 corporate account for 47% of growth in national savings, households contribute 30% and balance is by government.
Consumption and Consumerism
A culture in which the urge to consume dominates the psychology of citizens is a culture in which people will do most anything to acquire the means to consume–working slavish hours, behaving rapaciously in their business pursuits, and even bending the rules in order to maximize their earnings. They will also buy homes beyond their means and think nothing of running up credit-card debt. It therefore seems safe to say that consumerism is, as much as anything else, responsible for the current economic mess.
What needs to be eradicated, or at least greatly tempered, is consumerism: the obsession with acquisition that has become the organizing principle of American life. This is not the same thing as capitalism, nor is it the same thing as consumption. To explain the difference, it is useful to draw on Abraham Maslow’s hierarchy of human needs. At the bottom of this hierarchy are basic creature comforts; once these are sated, more satisfaction is drawn from affection, self-esteem, and, finally, self-actualization. As long as consumption is focused on satisfying basic human needs–safety, shelter, food, clothing, health care, education–it is not consumerism. But, when the acquisition of goods and services is used to satisfy the higher needs, consumption turns into consumerism–and consumerism becomes a social disease.
While countries around the world are benefiting from low-cost Chinese manufacturing, China is also providing – through both production and imports. The growing culture of consumption and consumerism in traditionally frugal China has serious environmental impacts. As per The World watch Institute’s State of the World 2004 report, “One quarter of humanity—1.7 billion people worldwide—now belong to the ‘global consumer class,’ having adopting the diets, transportation systems and lifestyles that were once mostly limited to the rich nations of Europe, North America and Japan.” While China and other developing countries are home to growing numbers of such consumers (particularly in large urban centres), however, disparities remain “as 2.8 billion people on the planet struggle to survive on less than $2 a day, and more than one billion people lack reasonable access to safe drinking water.” Internationally known brands of clothing and other products abound in China’s biggest cities (particularly Beijing and Shanghai), along with an increasing number of western restaurant and coffee-shop franchises. Consumerism has been termed the new “ism” in China, linking happiness to material goods and helping to drive the economy.
10
Hand in hand with consumerism is consumption, which in some cases means the using up of a resource. China’s goal of achieving a first-world lifestyle for its people wills double the world’s human-resource use. China’s current growth model is notable for its impact on the environment. The country is one of the world’s greatest producers of greenhouse gases and is the world’s largest coal consumer. Consumption patterns have definite ecological implications. Growing economic prosperity and consumer markets make the spending patterns of Chinese consumers an important site for extended Inquiry. Steps toward ecological sustainability can be achieved with a better understanding of what structures the consumption demands of the Chinese population. Direct effects on greenhouse emissions can be seen emerging from several locations. Increasing home sizes as well as increases in the amount of appliances and IT products being used mean more coal-fired power plant construction and higher levels of greenhouse gas emissions. In addition, the increase in landfills and biomass burning from growing disposal of goods has increased CH4 emissions. The energy intensity (energy use per unit of output) is some foursix times that of advanced countries if measured in current dollars. The changing pattern in energy use is resulting in steeply rising consumption of fuels and increasing imports of petroleum, and with it a rising concern on energy security. Reliance On coal for 71 percent of the total energy consumed and the rapid spread of motorization is intensifying air pollution and is contributing to greenhouse gas emissions. Previous MGI research on China’s energy productivity opportunity has identified China’s industry mix as a key driver of its resource intensity. Consumer-related and service sectors tend to be more efficient users of resources than heavy industry; therefore, a rebalancing of China’s growth away from industry and toward “ softer” sectors such as services and consumer would help boost the country’s already-commendable efforts to put the economy on a more environmentally sustainable footing.
What does increase in consumption mean for China and rest of the world?
The government has taken steps to initiate the transition to a more consumption driven growth path. For example: Outlays on social programs increased more rapidly, particularly in 2005-2007, which should contribute overtime to a reduction in precautionary savings by the households. Raising domestic consumption will have 2 effects: • Absorbing production capacity that China’s economy would otherwise channel into exports • Increase household spending which is likely to generate higher imports. Together these two effects will help narrow China’s trade surplus. This, in turn, will diminish the need for China to build and maintain foreign reserve assets, a position its leadership views as increasingly risky but must nonetheless accept as a necessary consequence of running large trade surpluses while maintaining tight capital controls. Although boosting the consumption share alone will not be sufficient to correct global imbalances, such a shift could make a contribution that would alter the tenor of international financial discussions on topics such as the security of China’s holdings of foreign assets and the valuation of the renminbi, both sources of contention in the global arena that have arisen because of China’s large trade imbalances.
11
Increase in Chinese consumption will help the economy insulate itself from the decline in demand for Chinese goods from the US and other global markets. Between January, 2009 and September 2009, China's exports fell by 21.3 percent compared with the same period in 2008. The country's total trade with the European Union dropped 19.4 percent while trade with the US and Japan declined 15.8 percent and 20 percent respectively, according to the General Administration of Customs. A breath taking fall in exports led to an investment downturn. An estimated 20 million workers lost their jobs in a short span. Higher domestic consumption will make the economy more resilient to external shocks during period of crises.
The reason underlying the leadership decision to rebalance the sources of growth is the desire to increase personal consumption and alleviate or at least slow the pace of increasing income inequality. In 2005 personal consumption in China was 30 percent less in real terms than the level that would have been achieved if the household consumption share of GDP had remained at the 1990 level rather than falling by more than 10 percentage points. India offers a useful comparison. In 2004 China’s per capita GDP was two-and-a-half times that of India. But, because house- hold consumption as a share of GDP was so much lower in China, per capita consumption exceeded that in India by only two-thirds. The ultimate purpose of economic growth everywhere is to improve human welfare. By this standard, China is falling far below potential.
Chinese consumption has to be different from that of the world. The consumption should necessarily increase incrementally and not drastically. This is because of the global interdependencies that China has with rest of the world. If China increases consumption drastically its exports shall reduce, its foreign currency reserves shall be affected and China will not have sufficient money to buy US T-bonds. Both however cannot be done simultaneously. Moreover different nations have different cultures, and the demographics are also different. The Chinese population is rapidly aging. That makes it necessary for them to save. As long as China gets rid of some of the structural failures or institutional problems that suppress consumption it are fair to have a considerable amount of savings.
How can China Increase consumption?
Sustainability of China’s growth has moved centre stage. After three decades of Exceptionally rapid growth, the sustainability of growth in terms of environment, social Stability, and even GDP growth itself is being widely debated. This group of policies comprises
a range of relatively short-term initiatives focused on creating a more comprehensive “consumption infrastructure” that would make it easier f o r Chine se c citizen s to purchase a wider range o f products and services than are available to many Chinese today. Some of these changes would require that consumers save less of their disposable incomes, while others would allow them to consume sooner through the use of consumer credit. There are two major policy thrusts for China to consider: Expanding the availability and improving the quality of products Today, there is a huge gulf between the retail and consumer experience available in China’s larger and wealthier cities and that in smaller cities and rural areas. Actions might include supporting the development of modern store formats, channels, and distribution networks (e.g., second-hand and leasing markets for cars, online shopping for many categories) and encouraging the continued 12
ment of bo oth international and domestic players throu ughout the consumer industry. developm
Compo osition o of GDP o of China a
120.0 1 100.0 1 80.0 60.0 40.0 20.0 0.0 1 2001 2002 2003 2004 2005 2006 2007 Agriculture Industry Construct tion Services
Source: Bureau of st tatistics of Ch hina
Increasi the avail ing lability and uptake of co onsumer cre edit The ava ailability and use o f con d nsumer credi is currentl low in C henna in co it ly omparison with other w countries, even those within Asi at similar development levels. Mea e ia asures to inc crease the av vailability of cred an d to encourage consumers to increase th use of c dit heir credit as a m means of res sponsibly financin home purc ng chases, educa ation, and a broader set of consumpti needs wo o ion ould allow co onsumers to borrow against fut w ture income to make big-ticket purch hases that wo ould increase their quality y of life y today. If pursued wi f isely, this wo ould contribu to a poten ute ntial boost in consumptio share of 1.5 to 3.4 n on 1 percenta points an ultimately help generat more weal for Chines household in the future. age nd te lth se ds
An imp proved soci Safety n would b ial net boost health care and r h retirement spending
Improvin the social-safety net p provided b the g gov ng by vernment w ill r educe p precautiona overary savings , increase e total spen nding on h health care and retire e ement, and cause discretionary consume spending to rise. But improving China’s soci er ial-safety ne is a critica step forwa for a et al ard number of reasons t that go beyo merely b ond boosting con nsumption. G Greater public provision will help c w guard ag gainst the pot tential for social al instab bility that ma result from the inequiti engendere by the ay m ies ed rapid economic grow and urba wth anization tha China is ex at xperiencing today. In addition, highe quality er care and pen nsions will fo foster lab o r p rod acti rivity gains o over the long g term and further g health c improve China’s gro e owth prospects. Underta aking structural reform would incr ms rease househ hold income e Shifting toward ser g rvices China’s political lea adership reco ognizes that shifting inv vestment to m more efficien and labou rather nt urthan cap pital-intensive service sec e ctors would h have a multip plier effect on employme economic growth, n ent, c and cons sumption. ing ent-related s sources of h household inc come Improvi investme At less t than 2 percen of average household i nt e income, investment-relate sources of income in China are ed f C low com mpared with other count tries; and the sources have not been increasin as a share of total ese ng e 13
income. Today, the real return n on financial assets in China is only 0.5 percent, compared with 1.8 percent in South Korea and 3.1 percent in the United States. Although improving returns on household assets over the long-term would require significant changes in China’s financial system, much progress is possible simply by giving high-saving households access to a greater r array of fine uncial products and services such as mutual funds, fixed-income products, annuities, CDs, and so on.
Revaluation of Chinese Currency
Undervalued RMB distorts international trade is because it transfers income from Chinese households (they have to pay more for imports) and subsidizes Chinese manufacturers in the tradable goods sector. This is one of the many mechanisms by which households are forced to subsidize production and investment. A revaluation shifts wealth from the Chinese government and the manufacturing sectors to Chinese households. It helps to reduce subsidies to manufacturers and returns the income to Chinese households, who can then increase their relative consumption. This will shift resources to households and away from producers, infrastructure investment, and real estate developers. This allows household income to grow relative to national income, which ultimately increases the consumption share of GDP.
Expansion of the coverage, reliability and efficiency of pension system
China’s pension system is still in a period of transition away from the “iron rice bowl” regime toward a system that provides benefits and oversees administration through governmental organizations rather than employers. The system faces a number of challenges, and we identify three broad sets of policies that could help to meet them. The government is already implementing so many of these policies but has thus far not focused serious attention on others.
Approximately 40-50% of Chinese workers have some form of pension coverage in different schemes providing for urban residents, rural citizens and civil servants. A) Centralizing administration and funds pooling
When China first recalibrated the pension system after its deregulation of SOEs, pension plans were administered at the municipal level; each city managed collections, pooled funds, and oversaw payouts to retired residents holding a hukou in that city. However, migration dramatically increased, this system came under severe strain. • Migrants have lost confidence in the system because they may have had to pay into the pension system in the city in which they work but do not receive coverage because they lack a hukou Cities have been unable to meet their pension obligations because they have had no access to a national pool of pension funding—i.e., even if another city has a surplus, it is not available because there is no national system. • Each municipality has its own burden of administrative overheads and bureaucracy, leading to scale inefficiencies. B) Closing the financing gap. The system currently faces a gap of 65% to 94% of GDP, according to World Bank. This is because of: • Low retirement age • Increasing life expectancy • Low collection rates (estimated at 70%) • Rapidly aging population • Low rate of return on funds which have traditionally been deposited in 1 yr deposit notes. Because of these there is a mourning urgency of financing factors. Encouraging financial-sector liberalization 14
China could boost non-wage sources of income by reforming the dividend policy for state-owned enterprises (SOEs) and encouraging the creation of a wider array of financial instruments to enable greater household participation in financial markets. Taken together, action on these fronts would encourage firms to make more judicious investment decisions and allow households to share in the profits generated by those firms, reaping dividends and realizing higher returns on their assets over time. This would help to reallocate capital toward private citizens or service sectors. China is already actively engaged in financial-system reforms, but the reform program is behind schedule and, in any case, China should consider broadening the scope of its plans for banking and capital market liberalization and development as part of its aim of shifting toward a higher consumption share.
Boosting growth of SMEs The growth of service sector is likely to hinge on the successful development of SMEs. Today these companies face a number of barriers to market entry (similar to their counterparts in developing countries) .Reform of business licensing procedures, more supportive
labour market policies, and easier credit access are necessary if service-sector SMEs are to increase their s h are of C china’s economic activity.
Conclusion
Inspire of continued efforts of China to increase its consumption and shift the economy towards a more consumer centric direction there has been a gap between realty and actual impact. . Take as illustration the 4 trillion renminbi government stimulus package that C china began
to implement in the winter of 2008. The package focuses heavily on funding for new highways and rail systems. Indeed, 89 percent of the entire package is devoted to infrastructure investment and only 8 percent to supporting consumption (the rest goes to bolstering corporate performance). Although shortterm support is necessary in the turbulent current economic conditions, China will need to look at longterm policies as well. China’s growth model has a great deal of momentum, and change will not come easily. Major shifts away from the current economic mix by 2025 will entail very difficult choices. As long as China’s economic structure remains so heavily weighted toward investment, that component of the economy will continue to grow. In other word, the government’s goal of boosting g the s h are of consumption will meet t with a strong headwind. Moreover, some of the policies that have the potential to e be effective in boosting the c consumption share of the economy are long term in nature—notably, improvements to China’s social-safety net may not contribute a great deal to the rebalancing toward consumption in a 15-year time horizon. Yet China has achieved enormous economic strides with a speed that has barely been replicated elsewhere in the world in recent history, and it is conceivable that China could take aggressive concerted action on the policy fronts described in this report. Moreover, the current economic climate makes a move away from net exports imperative. If the consumption share rises from today’s 36 percent to between 45 and 50 China would increase
another 10-15% of its GDP. The composition of the economy would show a marked shift, i.e. government spending would increase, service industry would boost, number of jobs would increase and so on. As per McKinsey, China’s share of world consumption would increase between 11 and 13% in 2025 up from 9% that we project from current trend and unchanged policy. This would mean that China would account for more than one-quarter of all new
consumption worldwide over the n ex t 15 y ears , adding more than ten percentage points to global 15
consumer demand growth in the process . For China, the prize of successfully engineering a shift to a new growth paradigm will be an economy that is less vulnerable to ill winds blowing in from overseas, has higher levels of efficiency and higher household incomes, and has a new maturity. By sizing the potential available from initiatives in different policy areas, this study seeks to illuminate some of the priorities that China might set if it is to vault the economy into a new, dynamic phase of its evolution.
Sources:
http://www.imf.org/external/pubs/ft/wp/2010/wp1069.pdf http://www.stats.gov.cn/english/statisticaldata/yearlydata/ http://www.mckinsey.com/locations/india/mckinseyonindia/
16
doc_115725910.pdf