China's shift to consumption drives reform and growth
- By Peng Wensheng
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E-mail Shanghai Daily, May 18, 2012
Just as "Made in China" has changed the global economic chain over the past decade, China's consumption boom could have profound impacts on the local economy and beyond.
As growth in the developed world remains slow, at least for the next few years, China may overtake Japan to become the world's second-largest consumer by 2020.
If consumption replaces investment as the main growth driver, it means that China is heading towards a more sustainable and balanced growth path. This will stimulate reforms of the financial system, corporate and public governance, which in turn could improve China's potential output. As consumption rises (or savings declines), overall financial conditions will tighten and money growth will decelerate. Consumer goods prices relative to capital goods, and non-tradable goods prices relative to tradable goods, are set to increase. The value of the yuan, in real effective terms, should appreciate moderately.
Falling government disposable income as a percentage of GDP and the decline of the government savings rate will diminish the government's importance in social resource allocation. Fiscal policies will rely more on taxes, transfer payments and public service expenditures, instead of investment. We expect automatic stabilizers to play a bigger role in the economy.
China's consumption will represent an integral part of the world's aggregate demand. Demand for foreign consumer goods will rise, and that for capital goods (i.e. commodities) will drop. As the trade balance contracts, China will export less net capital in the next decade; hence, the government's foreign bond holdings will fall while the private sector's investment in foreign equity will increase.
In the next decade, services consumption as a share of total consumption is set to rise at the expense of goods consumption. According to our top-down estimate, household consumption growth rates vary significantly among different sectors. Specifically, household spending on culture, education, entertainment, finance and insurance should see high growth, far above the pace in the past five years; growth of household consumption on healthcare and residence may slow moderately, albeit still at a high level; the consumption of food, clothes and household products will grow at a slower pace than other goods and will also be much lower than recent years.
Peng Wensheng is the chief economist with China International Capital Corp.
