Bumpy Way to a New Chinese Growth Model

April 4, 2012, by Hubert Fromlet, Kalmar

China wants to develop a new growth model that focuses more on private consumption as a growth-creating part in the economy – at the expense of the, until now, existing dominance of exports and investment. This relatively new objective has been announced officially, too.

This new orientation is logical. Heavy export dependence can under certain circumstances cause major problems, as is currently the case in China. The extreme high Chinese investment ratio in recent years – up to roughly 50 per cent of GDP – means an obvious risk for certain insufficient allocation of capital. And the opening of better consumption opportunities is not only a matter of creating new economic growth opportunities. It is also an important social issue.

In real life, however, the way to a more consumption-oriented society won’t be that easy – and certainly more complicated than many Western economists and commentators believe.

First, private consumption is already now growing quite considerably. Too little attention, however, is paid outside China to the issue of the increasingly uneven income distribution. Improvements in this respect are urgently needed to achieve fundamentally improved conditions for private consumption.

Second, acceptable social minimum standards have to be created for health care, pensions, education, etc., for achieving some fundamental downturn of the households’ high savings rate. Chinese political leaders know about these needs – but they also know that consumption-accelerating conditions cannot be created with short notice. It is much more of a medium and long-term project.

Third, as was said in the last edition of this blog, product quality improvements are needed as well – particularly in order to attract the younger urban generation to consumption goods that are “Made in China”. Imported consumption goods reduce economic growth – not the other way around.

Forth, Chinese exporters still have a strong lobby, which at the moment is reflected by a more cautious exchange rate policy. Exporters must be successful in the future, too. Otherwise the surpluses of the current account balance could be wiped out at some point – a development that would be counteracting China’s way to a more consumer-friendly trend.

Fifth, we do not know very much about the details of economic policy after the change of leadership at the end of this year. The Chinese people’s confidence in the future is needed for sustainable progress in private consumption to an increasing part of the Chinese people. Confidence, however, assumes continuous efforts and good/acceptable results.

Stronger growth inspirations to consumers do not come automatically.






Hubert Fromlet
Professor of International Economics
Editorial board

Back to Start Page

Comments are closed.