The age of the Chinese consumer

Since the sustained liberalization of the Chinese economy began in 1978, exports and investment have been the main growth engines of the economic miracle, driving a transformation of the economy.

In contrast, household consumption as a share of GDP has gradually declined, and is now estimated to account for about 33 percent of GDP, compared with about 55 percent in the early 1980s. This is very low compared with most other large developed and developing economies, and has made China too dependent on export and investment-led growth.

However, a major rebalancing is taking place in the structure of the Chinese economy, which, over the next decade, is expected to result in a significant shift away from the traditional growth engines of exports and investment, toward domestic demand-driven growth. This reflects a number of factors.

First, rapid growth in wages is expected to support strong medium-term expansion in consumer demand, helping to boost the share of consumption in GDP over the long term. Large annual increases in minimum wages across Chinese provinces, together with double-digit growth in manufacturing wages, particularly in the Pearl River Delta and the Yangtze River Delta, are helping to underpin consumer spending. IHS Global Insight forecasts that Chinese manufacturing wages will continue to grow strongly over the medium term, supporting rising household incomes and driving consumer spending.

Second, the nature of Chinese household consumption has transformed significantly over the past two decades, as Chinese economic development has resulted in rapid growth in average GDP per person. In 1978, at the beginning of economic liberalization, nominal GDP per person was estimated to be $225. Decades of sustained rapid growth have resulted in a far-reaching reduction in poverty as well as large rises in average GDP per head, which IHS Global Insight forecasts to average $6,400 (5,060 euros) this year.

The historical experience of other large economies such as the US and Japan shows that in the early phases of rising incomes, private consumption as a share of GDP declines rapidly as households shift away from subsistence living standards and increase their savings rates. However, this process stabilizes relatively quickly, and Chinese GDP per person is now reaching levels at which private consumption should firstly stabilize as a share of GDP then gradually move higher. The development of pensions and healthcare systems will also help this process, reducing the need for households to accumulate precautionary savings to cover retirement and health needs.

Third, China's 12th Five-Year Plan (2011-2015) also contains key policy elements that will support domestic demand. In particular, the continued strong policy focus on the economic development of inland provinces will help to support private consumption growth among a large share of the total population - an estimated 700 million people living in the inland provinces. The accelerated economic development of these provinces through large-scale infrastructure and urban development programs, helped by the relocation of manufacturing inland to benefit from lower wage costs, has helped to boost consumer spending in much of inland rural China, with rural retail sales up 17.2 percent year on year in November last year.

An important new element of the 12th Five-Year Plan that is to be introduced for the first time is a domestic trade development plan, aimed at speeding up the growth of domestic consumption through structural reforms and new consumer incentives, with a key objective to double total retail sales between 2010 and 2015, to reach 30 trillion yuan. Key priority segments will be cars and retail electrical goods, with home furnishings also a priority given the government has a goal to build 36 million affordable housing units over the 12th Five-Year Plan.

IHS Global Insight forecasts that Chinese retail sales will continue to grow rapidly in real terms over the next decade, making the Chinese consumer an increasingly important driver of global economic growth as the size of the Chinese economy nears those of the US and the European Union.

There is considerable evidence that Chinese private consumption is already showing significant positive momentum. Last year nominal retail sales rose by an estimated 17 percent year on year, reflecting the strong growth in consumer spending.

The increasing global power of Chinese consumer demand is well reflected in the auto sector, China having become the world's largest car market in 2009, overtaking the US. The Chinese auto sector then followed up on this achievement with spectacular further auto sales growth of 35 percent in 2010. The rising spending power of the Chinese consumer is also demonstrated by the rapid growth in premium auto sales in China, which rose 77 percent in 2010, and IHS Automotive forecasts a further 140 percent increase in premium auto sales by 2015.

In the view of one of China's business leaders in the consumer goods industry, Liang Xinjun, the outlook for consumer demand remains very positive. Liang, vice-chairman and CEO of the Fosun Group, says the Chinese consumer market will grow very strongly over the coming decades. Liang and I were speakers at the Horasis Global China Business Meeting in Luxembourg at the end of 2010, and he projected that "within 10 years China will become the world's largest consumer market. If China's GDP grows at between 7 and 8 percent per year over the next five to 10 years, domestic demand will grow at 15 percent per year, with demand for branded goods growing even more quickly, at around 20 percent per year." Liang maintains that optimism.

The Year of the Dragon will be one of transition and change for China. It will face challenges in rebalancing the structure of the economy away from export-led growth and investment toward domestic demand, and this transition will take many years. However, the long-term rise of Chinese consumer demand is well underway, and is creating a new growth engine for the global economy at a time when one of the world's key traditional growth engines, the EU, is mired in a protracted economic crisis. Strong growth in Chinese consumption will also help to gradually reduce the country's trade imbalances over the medium-term, as rapid growth in consumer imports results in a narrowing trade surplus, reducing international frictions over trade imbalances and the yuan exchange rate.

The author is the Asia-Pacific chief economist at IHS Global Insight. The views expressed in the article do not necessarily reflect those of China Daily.

(China Daily 01/20/2012 page7)