Can China become consumer-driven? (Revised)

As most of you have already heard by now, China’s economic growth in 2014 have slowed to levels not seen in over 20 years: a mere 7.4%, Wall Street Journal reports.  Raising concerns of diminishing global demand for commodities which could weaken the global economy as a whole.

China’s growth in the past few decades, since Deng Xiaoping opened China to the world, has been one of the greatest success story of economic reform and policy in recent history. Fueled by rapid industrialization and infrastructural development, China’s GDP is over 10 times larger than what it was just 20 years ago. Many economists have questioned how long China can sustain it’s growth. And alas, China has slowed down. Despite falling oil prices, the IMF predicts that China’s growth in 2015 will be as low as 6.8%

China’s government is on top of this issue, with President Xi Jinping saying that the nation needs to adapt to a “new normal” in the pace of economic growth and remain “cool-minded” amid a slowdown that analysts forecast will lead to the weakest expansion since 1990. (Bloomberg)

In light of economic growth, rising labor costs is making China less competitive as a manufacturer of low-tech exports. This creates a need for a more sustainable growth model, one that is driven by consumer spending and service industry, like the United States and many fully developed western countries. But this will be no easy task. According to the CIA World Factbook‘s 2013 data, China’s GDP composition consists of 10% in agriculture, 43.9% in industry, and 46.1% in services. Compared to the U.S.’s which consists of 1.1% agriculture, 19.5% industry, and 79.4% services; United Kingdom’s consists of 0.7% agriculture, 20.5% industry, and 78.9% services; and many other developed countries share a similar spread. We can see a huge disparity in the proportions where China’s agriculture and industry is far ahead but services lag behind.

Yes, China’s growth has put more money into the consumer’s hands; yes, the Chinese are now spending more than ever on luxury goods and services; and yes, China is heading towards that goal. But there are also huge social issues that need to be addressed. In my trip to China last year, I have seen that much of China’s growth has been in urban environments, resulting in huge migrations of people into industrialized urban zones. This leaves rural area even more underdeveloped, creating huge income gaps. Cost of living in urban environments have also gone up; in places like Beijing and Shanghai, consumer goods cost even more than the U.S. In rural towns, however, there have not been much change. The Chinese government is aware of these issues and have increasingly made efforts to develop rural zones, but it doesn’t seem enough. Another issue is that the Chinese generally have a saver’s mentality; a lot of us emphasize saving now so that we can have more later. To top it off, the Chinese government is reluctant to adopt stimulus policies; though I am assuming this is because of the saver’s mentality, stimulus packages will not have much of an effect on consumer spending.

China’s endgame seems to be a consumer-driven economy. But as of now its rural zones still require large amounts of infrastructural development. To juggle industrialization in rural zones and de-industrialization in urban zone will surely be a challenge.

In a most recent article regarding incoming foreign investments, an increase in foreign invests is observed, and services accounted for 2/3 of inbound investments, while high-end manufacturing took up almost all of the remainder. While this demonstrates progress in China’s shift towards a service-industry, it also shows that China is no longer attractive for low-end manufacturing.

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