China needs domestic consumption to boost growth

Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep rebuilding bridges and build cities that nobody lives in, at some point it becomes unsustainable. Furthermore the export market is becoming harder with protectionist policies around the world after the COVID-19 outbreak and the rise in authoritarian states. China’s 1.4bn population are therefore the one remaining source of economic growth but there are concerns:

• China’s consumers are big savers – see graph from the FT

• Consumption accounts for 55% of GDP, compared with 72% for the world

• China for 32% of global investment and 18% of GDP, but only 13% of consumption

• China consumed 7% less per person than Brazil in 2022, though it produced about 40% more.

• There is limited savings in China mainly because they didn’t receive any support from the government – fiscal transfers.

• House prices are falling and people feel poorer

• Savings rates are higher than pre COVID 2019.

Therefore the challenge for the Chinese governments is to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG: GDP = C↑+ I↓+ G + (X-M) The Chinese have been talking about this rebalancing for a number of years – moving away from exports and investment. But consumption today is approximately 55% of GDP, similar to that in 2004.

What are the options? To get Chinese consumers to open their wallets you may consider why they save so much in the first place. With limited health care and pension provision consumers become more prudent but if the government where to provide more funding they might feel confident to change their spending habits. The BBC podcast ‘The Real Story- China’s economy: How worried should we be?’ is worth listening to.

Source: The Economist – Can China’s consumers save its economy? 6th February 2024

For more on Aggregate Demand and Saving view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.