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Feb 6, 2013 | 11:15 GMT

6 mins read

Creating a Chinese Consumer Base

Creating a Chinese Consumer Base
ChinaFotoPress/Getty Images

One issue will be particularly important in shaping the Chinese government's approach to social and economic development over the coming decade: transforming China's nearly 800 million workers (including some 250 million migrant laborers) into consumers. For a system that has reached the limits of an economic growth model that has underpinned social stability and regime security for more than 20 years, doing so is a fundamental political imperative.

Toward this end, China's State Council on Feb. 5 announced a long-delayed plan to help close the country's widening wealth gap by increasing minimum wages to 40 percent of average provincial salaries. This initiative has encountered enormous political resistance over the last decade, but it reflects Beijing's shifting political, social and economic priorities.

For nearly 30 years, Beijing has relied on an export-oriented economic growth model that has generated enormous capital and near-universal employment. However, it often did so at the expense of efficiency, productivity and purchasing power of ordinary Chinese workers. Now, as domestic investment has become the main driver of economic growth and demand for Chinese goods abroad has declined, the central government senses that it must shift from this model to one grounded in a more robust and confident Chinese consumer base.

This policy shift comes at a time when small- to medium-sized manufacturers (some of China's largest employers) are already hurting from weak external demand, rising input costs and limited access to state-backed credit. When combined with the strong political resistance that measures to increase wages and improve working conditions are likely to meet from state-owned enterprises and municipal governments, these conditions have put Beijing in a bind. On the one hand, the central government recognizes that to stimulate domestic consumption it must continue to raise wages while introducing other measures to boost consumer confidence (such as increased access to health care and urban social services, as well as affordable housing). On the other hand, it knows that raising wages or implementing other reforms that would raise the financial burden on manufacturers and local governments too quickly could trigger a premature collapse in the manufacturing sector, threatening Beijing’s primary social and political imperative: employment.

China's Provinces

China's Provinces

The need to rebalance the Chinese economy away from overreliance on exports and state-led investment and toward greater domestic consumption has underpinned most of the Communist Party's major social and economic policies over the last decade, including inland urbanization and efforts to reform the household registration or "hukou" system. This need likewise infuses public speeches by China's top policymakers. Over the last two months, incoming Premier Li Keqiang has repeatedly emphasized the importance of urbanization as the basis for China's long-term economic stability. In a speech on Jan. 29, Premier Wen Jiabao called for greater efforts to raise living standards for China's rural poor. Li and Wen's speeches — like much official Chinese commentary on wages and working conditions — frame the issue indirectly, in terms of urban development, social welfare and income inequality. But ultimately the target of their speeches — like their policies — is China's weakening domestic consumer base.

A Unique Weakness

China has by far the lowest domestic consumption rate of any major economy, developed or developing. Last year, household consumption expenditure as a portion of gross domestic product fell to 37 percent — well below those of India, Indonesia and Germany (all 57 percent), as well as China's nearest East Asian peers, Japan (60 percent) and South Korea (53 percent). Neither Japan nor South Korea, even at the height of their days of export-driven growth, ever saw domestic consumption dip below 50 percent of gross domestic product. In fact, the only countries with comparably low household consumption rates are either tiny (Luxembourg and Bhutan) or rely almost entirely on energy exports (such as Azerbaijan).

China's domestic consumer base is uniquely weak relative to its economy — the opposite of Beijing's largest trading partner, the United States, where consumption equals 72 percent of gross domestic product. Most troubling for China's new leaders, however, is that over the last decade Chinese household consumption has declined in perfect lockstep with the expansion of the economy as a whole.

In 2000, household consumption equaled 47 percent of China's gross domestic product, compared with exports, which made up 23 percent of the gross domestic product. Six years later, consumption's contribution to the gross domestic product had fallen to 35 percent, while that of exports had risen to 39 percent. When the 2008 financial crisis struck and external demand for Chinese goods dried up, exports' contribution to gross domestic product inevitably began to fall. But recognizing that Chinese consumers were in no position to make up the slack from declining exports (especially now that many of them faced possible unemployment), Beijing in early 2009 launched an emergency stimulus plan.

The depth of China's dependence on U.S. and European consumer demand prior to 2008 is best illustrated by the enormity of Beijing's response to the sudden evaporation of that demand. Between 2008 and 2010, the central government pumped as much as 27 trillion renminbi ($4.3 trillion) in credit into the economy. Most of that went to infrastructure development and property construction, which soon emerged as key drivers of economic growth (amounting to 46 percent of gross domestic product in 2009). But if the key long-term aim of stimulus spending was to lay the urban infrastructural foundation for eventually building a robust domestic consumer base (first on the coast, then inland), the immediate effect was to push consumption expenditure's share of the economy lower than it ever had been at the height of the export-driven growth model. Throughout 2009 and 2010, domestic consumption hovered at 33 to 34 percent of gross domestic product, despite massive gains in minimum wages over the previous decade.

Beijing's Logic 

For most of the last decade, China's weak domestic consumer base was not a major source of concern for Beijing. In fact, it was a direct byproduct of central government policies designed to enhance the export economy. For Chinese policymakers, weak per capita consumption and a robust and competitive export sector were two sides of the same coin. Having a strong consumer base would have necessitated higher disposable incomes relative to cost of living (as well as a host of urban social services, thereby putting immense fiscal burdens on coastal municipal governments), and that would have meant significantly higher wages. But high wages were anathema to China's growth model, which was grounded in the ability of coastal manufacturing to undercut any producer of low-cost goods in the world.

Sustained competitiveness in exports meant two things for Beijing: capital inflows (in the form of trade surpluses with China's major export partners, as well as savings deposits from coastal workers) and employment. Continued expansion of the export sector provided more room to absorb surplus labor from the interior, while the unending flow of cheap, young labor from the interior guaranteed continued growth and competitiveness in the export sector. Declining average household consumption expenditure (as a reflection of low wages, high savings and abundant labor) was seen as an acceptable temporary price to pay for an otherwise successful economic model. That model served a concrete economic end — the accumulation of capital by the state — and enabled Beijing to maintain its promise of employment and a modicum of prosperity to the Chinese people.

Now, however, with China unlikely to regain its title of "workshop of the world" even if the Party's ambitious plan to transform the interior into a new manufacturing and industrial base comes to fruition, Beijing is trying to move away from this model. It does so under extreme constraints — most notably, resistance from China's vast and entangled state-industrial complex, which has little interest in giving up control of the country's key sectors. Even if Beijing is able to break the state sector's monopoly on lending and spending — for example, by liberalizing capital controls and expanding individuals' and private businesses' access to credit — it faces a far more deep-set problem: a social and cultural disinclination to spend beyond one's means. Generating a truly widespread consumer culture in China will take more than higher wages and access to social services or housing. It will take time.

Creating a Chinese Consumer Base
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