photo: Thomas Depenbusch
As China’s growth is decelerating, Chinese purchasing power is accelerating. The next five-year plan will boost the change.
Only a few years ago, China still enjoyed double-digit growth. According to third-quarter data, the Chinese economy grew 6.9 percent year-on-year. As a result, some observers have concluded that the Chinese economy is in trouble, Chinese consumers are hunkering down and the next five-year plan must be dead on arrival. In reality, Chinese economy is rebalancing as expected. Chinese consumption is more vibrant than before. And the new plan is likely to ensure that this will remain the case for the next half a decade.
The end of the ‘old normal’
China’s government leaders are expected to disclose an outline of their 13th five-year plan this week. The apparent aim is to rebalance the Chinese economy toward consumption. The toughest test of the new plan will be reforms of state-owned enterprises (SOEs). The key to success is to time the SOE reforms right. As economist Liu He recently suggested, there is a strong need for “intensified efforts to shut down zombie firms and an end to overcapacity.” The key to success is to time the SOE reforms right. If you move too fast, you risk additional unemployment, bad loans and social disharmony. If you move too slowly, you will contribute to a false sense of stability, creeping assets bubbles and decreased growth. Until recently, Chinese growth relied on investment and net exports. That was fine as long as the government was in a position to invest and the rest of the world could absorb Chinese exports. That era, however, ended with the global financial crisis. There is no return to the ‘old normal.’ That’s gone for good. Yet, old habits change hard. Right before the crisis, total savings soared to 50 percent of the GDP and by 2012, the share of household consumption plunged to 29 percent of the GDP. But what about today, is the economy rebalancing in the Xi-Li era? Yes, it is, both in short- and long-term.
Toward services and consumption
According to the third-quarter data, fixed-asset investment continues to lose momentum. It expanded just 10.3 percent year-on-year, which marks the slowest growth since 2000. In contrast, the service sector accounted for 51.4 percent of GDP, compared with the industrial sector’s 40.6 percent. The old China of manufacturing, investment and exports is fading. The new China of services, innovation and consumption is emerging. Typically, retail spending was a ray of light, growing 10.9 percent last month. Last year, consumption was still 38 percent of the GDP; much more than before but still lower in comparison to other emerging economies. Given the current transition, consumption has the potential to double by 2030, which could lift its relative role in the economy to 50 percent. Last year, private consumption in the mainland increased to US$3.8 trillion — or the same value of Germany’s economy — while Chinese tourists spent a record US$165 billion, an increase of almost 30 percent from the previous year. During the ongoing year, growth will be within the government’s “flexible 7 percent” target, around 6.8-6.9 percent. Next year, growth is likely to decelerate to 6.3-6.5 percent and by the early 2020s it is likely to be around 5 percent. What this means internationally is that China continues and will continue to grow 3-4 times faster than the major advanced economies: the US, the EU economies and Japan. Indeed, despite the deceleration of growth, Chinese GDP per capita is expected to double within a decade. Chinese economy is still expanding, but living standards are rising even faster in relative terms — as they should.