Pushing China Forward: The Difficulties of Stimulating Domestic Consumption

China's struggle to control domestic markets. 

The Economist predicts that China will overtake the US’s GDP in 2019.  This has huge implications for the future of the world economy.  But when thinking about China vs the US or even vs Europe or Japan, I can’t help but feel that although the aggregate production of 1.3 billion Chinese citizens could be more than that of 300 million Americans, the Chinese aren’t world leaders in anything other than cheap exports.

China's economy still lacks a middle class and domestic industry.  Its GDP per capita is still miles behind its American, European, and Japanese counterparts. According to the IMF, the US ranks 9^th worldwide with $47,132 GDP per capita, Japan 17^th with $42,325, and China 95^TH with $4,283.  While China produces a lot, its people are still poor.  We have yet to see how the country handles the transition to an economy of consumption.  As of now, China is still just an export economy that maintains an artificially low exchange rate to propel international trade.  How will China fare when it stops piggybacking and peddling cheap goods to the rest of the world?  Some day soon, China will need to alter its domestic spending habits. 

The looming unknown is how China’s economy will react once the export focus shifts inwards toward consumption.  Strong domestic markets showing positive growth would lead to a stronger Yuan, and thus weaken exports.  Since the current trade surplus of $170.4 billion provides the investments that sustain China’s economy, domestic industry would need to fill the gap in order to maintain current growth levels. Can average citizens making $4,283 support a domestic economy that competes with America’s? 

Stimulating local commerce is not the same as forcing industrial growth.  Over the last ten years, Chinese wages, as a share of GDP, have dropped from 53% to 40% -- the opposite of what is needed to strengthen domestic spending.  If China were to raise the minimum wages, prices to manufacture would rise and cause exports to drop before domestic markets could develop.  The ruling party needs to recirculate export wealth in order to generate domestic markets.  But growing income inequality (as demonstrated by a Gini Coefficient of 0.28 in 1983 rising to 0.41 in 2010) shows China’s inability to create middle class spending, the most important factor in increasing consumption.

For China to become a world leader, it needs to first create a sustainable domestic economy.  Even if the US continues its stagnant growth, China has yet to prove that it can manufacture domestic stability as well as it produces factory exports.

Pushing China Forward: The Difficulties of Stimulating Domestic Consumption