China: From Investment to Consumption-Led Growth

06 Feb, 2014    ·   4292

Tilak Jha looks at the evolving nature of China’s economic expansion

Current trends suggest China’s slow march towards becoming a consumption-led economy, balancing what some economists term irreconcilable but inevitable in China’s case: growth and reform. Chinese GDP grew by 7.7 per cent in 2013 – the slowest since 2000 but higher than the state’s own projection of 7.5. Its total trade in 2013 grew a by a healthy 7.6 per cent to USD 4.16 trillion - higher than the US for the first time. 

More importantly, though, while exports grew by 7.9 per cent, imports also grew by a strong 7.3 per cent, nearing almost USD 2 trillion – three times than in 2006. Supporting the trend in favour of consumption, China's National Bureau of Statistics said recently that the tertiary sector accounted for 46.1 per cent of GDP in 2013 - higher than the secondary sector unlike earlier. Similarly, there remains a strong demand for cars and a stronger one for real estate despite sharp price rises. Car sales rose by 14 per cent to reach a record USD 21.98 million and new homes sold 27 per cent more, amounting to USD 1.1 trillion in 2013. The November 2013 data also suggested that consumption-led growth was rising faster than investment-led growth.
On the policy front, there are clear signs of a renewed focus on propping up consumption as underlined during the 18th Communist Party of China (CPC) Third Plenum in November 2013. The Plenum also emphasised what China’s critics have been saying for a long time - that the one-sided pursuit of GDP growth, excessive dependence on exports and government investment for growth, and the current system of urbanisation among others, was unsustainable.

The most recent aspect of China's new economic policies involves prioritising poverty relief over GDP figures. The Central Committee of the CPC and the State Council said in its guidelines issued in late January 2014 that over the rest of this decade, officials’ performance in 592 poor counties would be evaluated through the creation of means to generate livelihood, and focus on environmentally and economically sustainable growth. A nationwide information framework is also proposed to aid future poverty alleviation efforts. 

Despite China being the world’s second largest economy, its average national income is low with wide disparities (high GINI) and structural problems like artificially kept lower minimum wages. It acts as a hindrance in poverty alleviation and enhancing prosperity. On a positive note, wages are moving north. So far this year, the minimum wages announced in Shenzhen – a commercial hub – rose by 13 per cent. Emerging economic centers like Yangzhou witnessed a higher minimum wage rise at 15.6 per cent. More provinces will follow the trend and in turn demand expensive goods, better healthcare and stricter water and air standards – all of which will push consumption. Nonetheless, each of them will depend on the overall growth momentum which is under pressure.

Deputy Director of the School of Economics at Fudan University Sun Lijina acknowledged in a recent article the enormous challenge of sustaining China's growth while instituting reforms simultaneously. Of particular concern has been the real estate and financial sectors - both mired in a market that is at best unbalanced. Real estate prices continue to soar beyond the reach of the average buyer – registering double-digit growth even in first-tier cities like Beijing and Shanghai. Banks have been party to China’s bad investment problems. Banks and equity markets in China are yet to be used to tighten the liquidity scenario.

Real estate and banking companies’ shares registered a sharp decline in June 2013 after the central bank tightened liquidity by raising lending rates. The central bank has since intervened to douse fears of a liquidity crunch, the larger message being the promotion of genuine investment. Speculative trading and shadow financing has thrived in China with easy bank loans despite government strictures for banks to support real economic activity. The market, Sun said, needs to be made more transparent and fair to face the challenges that are coming.

Chinese economic exceptionalism in maintaining high economic growth for three decades and even after the 2008 financial crisis provides compelling reasons to be optimistic. However, serious concerns remain about the inefficient investments and increasing ratio of new debt being used to pay existing debt in China. Post 2008, lending rose in China at a fast annual rate of 15 per cent of the national income per annum, pushing the total debt to twice the GDP – approximately USD 15 trillion bank liabilities. If unrestrained, this could push China towards a financial crisis.

Chinese policy-makers are thus mulling over taxation reforms, transparency and accountability mechanisms to account for the borrowed, borrower and repayment, and restrictions on showy expenditures. Government plans involve charging state-owned enterprises higher dividends and allowing more private capital in infrastructure, apart from curbing bad local government loans. Efforts towards ramping up health and social security so that people can lessen their extraordinarily high savings are maturing.
Another round of foreign and domestic investment to tap the rising consumption inside China cannot be discounted on rising costs and salaries alone. A relatively favourable international market scenario in 2014 can only make the ongoing transition to a sustainable economy easier. Nonetheless, pushing China towards too fast a transition could send it off the track and the government’s policy reflects this caution.