China’s shoppers may take 10 years to step up
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Chinese policymakers are gung-ho to transition their economy away from investment and toward consumption, but that may not happen for another decade, new data shows.
“Without a substantial intervention, we believe consumption’s share of China’s economy is unlikely to rise substantially before 2025,” The Demand Institute, a non-profit organization operated by The Conference Board and Nielsen, said in a new report.
Private consumption as a share of gross domestic product (GDP) will average 28 percent from now until 2025, the think-tank said.
To be sure, the mainland has long underperformed the global average in this regard as Beijing previously focused on export-led growth.
Consumption as a share of GDP was 37 percent last year, according to the Brookings Institution, compared with around 70 percent in the U.S. and 60 percent in fellow emerging market, India.
The indicator has only recently started to stabilize in recent years. Consumption relative to GDP declined 48 percentage points from 1952 to 2011, one of the longest and largest drops of any nation on record.
Based on an examination of 167 countries between 1950 and 2011, the report found that nations with similar economic characteristics to China saw consumption remain flat relative to GDP for a considerable period following previous declines.
China’s desire to rebalance its economy stems from the need to avoid the dreaded “middle-income trap,” in which developing countries are unable to graduate into high-income countries after achieving a certain level of per capita GDP.
While many economists believe the economic transition is already underway, albeit at a gradual pace, they also expect it will take a while before consumption’s share of GDP spikes higher.
“Only towards the end of decade, when the economy slows further to 5-6 percent, consumption’s share of GDP will become more important,” said Jian Chang, China economist at Barclays. “But we have seen investment slow significantly and I think total consumption as a share of GDP could near 50 percent this year.”
Beijing’s strategic vision of boosting consumption was first outlined in 2011’s 12th Five-year Plan and since then, the government has unleashed a slew of measures, including raising wages and slashing import tariffs on high-demand goods.
But The Demand Institute warns that the burden can’t rest on the government alone: “It is up to business to nurture the demand that policy unleashes, aligning goods and services with consumers’ shifting preferences.”
Ensuring access to products and services via reliable distribution channels, satisfying demand across different income, regional and age groups as well as offering more financial services to support consumption are some of the factors that businesses can embrace, the report said.
Questions & Answers
Q.What is the middle-income trap that China wants to avoid?
What is the middle-income trap that China wants to avoid?
The middle-income trap describes developing countries that fail to become high-income nations after reaching a certain per capita GDP. Rebalancing the economy is China's strategy to avoid this outcome.
Q.When did Beijing first outline its plan to boost consumption?
When did Beijing first outline its plan to boost consumption?
Beijing's strategic vision for increasing consumption was first detailed in the 12th Five-year Plan in 2011. Since then, the government has introduced measures like raising wages and cutting import tariffs on popular goods.
Q.What role do businesses have in nurturing demand, according to The Demand Institute?
What role do businesses have in nurturing demand, according to The Demand Institute?
Businesses need to nurture demand by aligning goods and services with changing consumer preferences. This includes ensuring access to products, satisfying diverse groups, and offering more financial services to support consumption.
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