In following the export-led growth model pioneered by Japan, South Korea and Taiwan, China's size presents problems in its efforts to shift up the global value chain. China faces the challenge of cultivating an advanced manufacturing-based economy grounded in high levels of human capital (and correspondingly high wages) while creating the high-income consumer base necessary to sustain that economy. Where Japan, South Korea and Taiwan could look to the American consumer to help them climb up the value chain, China must look first and foremost to itself.
Today, as China struggles to carve out its own place in the global market for high-tech and advanced manufactured goods (all the while trying to retain its grip on low-cost export sectors), it is unclear whether global market demand is, or soon will be, sufficient to absorb future Chinese output. China may simply be too large a producer — and the United States, Europe and other advanced economies too small of consumers — to follow the pattern established by Japan, South Korea and Taiwan exactly.
The Chinese government is aware of the pitfalls of relying too much on demand to drive the economy's shift from low to high value-added manufacturing. By relaxing controls on the yuan, instituting programs such as depositor insurance and a strong social safety net, and accelerating urbanization in the interior of the country, the government intends to cultivate a domestic consumer base sufficient to absorb more of what Chinese industry produces.
Private household consumption in China is 36.5 percent of gross domestic product, which is extremely weak in comparison with other export-intensive economies such as Germany, Japan and South Korea (all of which boast consumption-to-GDP ratios over 50 percent). Cultivating strong and sustainable household consumption takes time, and in China's case it will require significant financial reforms aimed at improving the confidence and financial power of Chinese citizens. China's leaders will do what they can to roll out reforms and initiatives that they hope will begin to generate the kind of domestic consumption the country desperately needs.
