Consumers Can Drive China’s Transformation to A High-income Economy with Steady Growth

  Time:2015-02-10   Hits:0

Europe’s World:  February 2 2015

During the next ten years, China’s economic growth depends largely on whether the huge consumer potential of its 1.3bn citizens is fully utilised, and whether it can transform its development model from one being driven by investment and export to one driven by consumption. So the fundamental question is whether China is entering a new era of a consumer society. I believe the answer is “yes” with the necessary free-market reforms. 

First, the demand for necessities (food, clothing and shelter) is falling, and the demand for goods and services for all-round human development (education, health care, communications, etc.) is growing. The mainstay of urban residents’ consumption is changing from industrial products to services, and those citizens will be in the majority by 2020. Meanwhile, rural residents’ consumption is changing from daily necessities to industrial products. Second, material consumption is falling while service consumption is increasing. For instance, the proportion of urban residents’ national average expenditure per capita on medical and health care, transportation and communications, and on culture, education and entertainment, has climbed from 12.79% in 1985 to 33.3% in 2012. Third, the shortage of private goods has been greatly eased, while the shortage of public goods and services is becoming more and more noticeable. For instance, social security has been at the top of the list of the biggest concerns of Chinese society for five consecutive years from 2010 to 2014. Consumer demand has been growing. First, the average level of consumption per capita has increased strikingly. In the 35 years between 1978 and 2013, the national average consumption per capita has multiplied almost 85 times – from 184 Yuan in 1978 to 15,632 Yuan in 2013. Second, the untapped potential of services consumption, such as medical and health care is huge. For example, the annual demand of special products for the elderly is estimated at 1 trillion Yuan, but the current annual supply has only been 100bn Yuan, which leaves a huge gap to be filled. Total consumption has been expanding. First, the annually added consumer demand has been expanding. In 2012, the newly added urban and rural residents’ consumption demand exceeded 2 trillion Yuan, almost as large as the annual total consumption during the 1990s. Second, the total size of consumption has been gradually increasing. The expenditure of urban and rural residents’ final consumption leaped from 175.91bnYuan in 1978 to 19.04 trillion Yuan in 2012, and 2013 saw another jump to about 24 trillion Yuan. It is estimated that the total size of consumption in mainland China will reach 45 to 50 trillion Yuan in 2020. The huge consumer demand of 1.3bn people is China’s biggest advantage. Expanding domestic demand and boosting consumption will have great impacts on its economic growth in the next ten years. It will drive the economy at an annual growth rate of around 7% in the next ten years. In 2020, China’s final consumption rate is expected to reach 60%, with residents’ consumption rate around 50%. Driven by such a huge consumer demand, it is possible for China to maintain an economic growth rate of around 7%. This will advance the structural re-adjustment of the economy. Changes in the consumption structure are bound to bring profound changes to industry. As is estimated, the service sector’s contribution to GDP in China will climb from 46% to 49% in the next two years. And it is highly likely that service sectors will take up 55% of the total GDP by 2020. In the next 7 years, if the economy grows at a rate of around 7% as anticipated, GDP per capita will rise to around $12,000 by 2020. Thus, China will have successfully become a high-income economy. In the coming ten years, China’s consumer-driven economy will have some vastly different characteristics from those that have been seen in the last few decades. The major change will be the rapid development of service sectors in the new era of consumption. In 2016, China’s tertiary industry will account for more than 50% of its total GDP, initially establishing the dominant role of service sectors in driving economic transformation and development. Yet it has to be pointed out that the key to developing the tertiary industry is to open up the market and to promote institutional innovations. Evidence has shown that China’s service supply cannot meet the demand of its society, and that the investment gap in service sectors is not because of capital shortage, but because of the delay in opening up of the economy. To vigorously promote the development of the tertiary industry, the key lies in breaking up administrative and monopolistic control, and in giving full play to the role of private capital. Another major trend is migration from rural to urban areas. In 2013, China’s physical urbanisation rate was 53%, while the population urbanisation rate was only 35%. Not long ago, the Chinese central government made a resolution on reforming the hukou (household registration) system, allowing rural residents to register their residences in medium and small-sized cities and townships, while rationally restricting the population size in mega-cities like Beijing and Shanghai. Therefore, the process of integrating rural migrants into urban areas (i.e., granting rural migrants urban hukouand equal access to public services currently enjoyed only by urban residents with urban hukou) is sure to speed up in the next 3 to 5 years, and the population urbanisation rate will be likely to surpass 53% by 2020. Upgrading the consumption structure and expanding the total size of consumer demand will determine the orientation of structural changes in, and space for, growth in investment. A core goal of consumption-driven economic transformation is to effectively expand investment by increasing demand for services. In 2010 and 2011, the investment in the manufacturing sectors and real estate industry altogether took up 54.7% and 59.1% of total investment respectively, leading up to a serious shortage of investment in service sectors.  

China needs to make greater efforts to promote structural reform of investment. This will help realise a dynamic balance between investment and consumption so as to stimulate investment in the service sectors. 

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