China’s Consumer-led Growth

By Mohammed Almahmoud

July 5, 2012

China’s significance in world trade comes from its huge population. About 18 percent of the world’s population lives in China. That huge population can be looked at from two sides; as an economic recourse, and as a huge market. According to WTO, China is the largest exporter and second largest importer of goods in the world.

But consumption is the sustainable path for China and it lower that the desired level which creates a challenge and an opportunity for the country. Many economists (Woetzel 9.30) believe that the most efferent way for China to grow in the future is to increase consumption. They cannot increase the net exports or investment because they already reached a high share of GDP. But private consumption accounts for about 35% of GDP. The target consumption is 50% of GDP which means there is a 15% gap between factual and target consumption according to Cao Yuanzheng, Chief Economist of Bank of China International Holdings. (Woetzel 3.00 and 8.00)

The consumption is low because of few reasons: unfair income allocation, the uncompleted social security system and the demographics of China. First, Income allocation has a large impact on saving. Individuals with high income tend to save more. If a small percentage of a society allocate much of the resources, national savings is expected to account for a large share of GDP. Second, Wang Xiaolu, Deputy Director of Nation Economic Research Institute ((Woetzel 5.00), only 33% of the population in China are covered by the social secure system. That causes people who aren’t covered by the social security system to depend on saving when retired and hold their consumption. Third, the demographics of China has an impact of saving that is related to social security coverage. China has a large baby boom generation. The members of this generation reach its peak income years and its members are saving for retirement. The fact that baby boomers in China have fewer children to support them in their old age gives another reason for Chinese to save. (Harbaugh 8)

In order for China to sustain their high growth, they need to enhance consumption gradually. One way to improve consumption is to reallocate income. Better income allocation, by creating more middle income population because middle-income individuals tend to have a moderate consumption/saving ratio, will improve the total consumption. Another way to enhance consumption in China is to improve social security and insurance systems. People will consume more if they feel secure after retirement. But the challenge is that improving social security systems to cover more citizens need a huge budget that need taxes to be raised. Increasing taxes negatively effect consumption which contradict the target goal.

Patrick Chovanec believes that there should be shift toward consumption as a sustainable trend by making a shift in focus of the Chinese economy. He argues that a correction involves adjustments and adjustments means pain. And the pain will be more severe for each year China delay the adjustment. (Chovanec). But Li Xiaoxi, Director of Institute of Economic and Research Management, thinks that “Li Xiaoxi: China’s consumption should increase incrementally, not drastically. A dramatic jump in Chinese consumption is not necessarily a good thing, as the global economy is so interdependent. Some people suggest that if China consumes all the goods, there will be nothing left for export.”(Woetzel 3.00) I agree with Li, consumption improvement should not be sudden, but rather gradually in accordance to the economy situation and China growth goals. For example, savings (investment) encouragement is the expected action by the government in economy downturns to stimulate the economy. The government can encourage consumption without hurting exports and investment.

To conclude, I believe that the sustainable way to China to continue their raped growth is through consumption. The shift toward consumption should be gradual over many years to create a balanced economy with rapid

Reference:

Woetzel, Jonathan. “China’s consumption challenge”. McKinsey & Company. 2009. <http://www.mckinseyquarterly.com/Chinas_consumption_challenge_2427&gt;

Harbaugh, Rick. “China’s High Savings Rates’. Kelley School of Business, 2004. <http://www.bus.indiana.edu/riharbau/harbaugh-chuxu.pdf&gt;

Chovanec, Patrick. “A Consumer-Driven Economy Necessary for Future Growth in China”. China-United States Exchange Foundation. 2011. <http://www.chinausfocus.com/slider/consumer-driven-growth-the-basis-for-future-growth-in-china/&gt;