From 'Made in China' to 'Sold in China': The Rise of the Chinese Consumer
As China transitions to a more consumption-led economy, Chinese incomes will grow and a massive middle class is expected to emerge.
March 2015 | by Dr. Andrew A. Lloyd
The urban consumer markets, in particular, will develop rapidly, moving from 43 percent of the population today, to 69 percent by 2015, and 76 percent by 2025. Most important, this urban phenomenon will spread beyond China’s large wealthy coastal cities, to smaller cities further inland.
As the incomes of the new middle class rise dramatically, China will become the third-largest consumer market in the world by 2025. A key characteristic of China’s new middle class will be that these households will begin to spend a larger proportion of their income on discretionary items, thus significantly changing the patterns of spending in the economy.
It is important to note that the spectacular rise of China’s urban middle class, and its consequent impact on consumption, does not depend on major changes in Chinese savings behavior or on particular government policies (although certain policies could accelerate or slow the process). Even the impact of varying future growth rates tends to alter only the timing of these developments, not whether they happen at all.
Enhancing Growth Prospects in China
In the 35 years since China’s transition to a market economy began, the country has grown at an average rate of 9.8 percent per year—an explosive and unprecedented rise. While it is unlikely to experience that level of growth going forward, taking steps to ensure that China meets its full potential presents an enormous opportunity.
China’s economic growth has been slowing over the past five years. In the third quarter of 2014, it was just 7.3 percent, and the country is likely to continue to face stiff headwinds, at least when compared with previous decades. As policy makers in 2015 draw up the country’s 13th Five-Year Plan (2016–20), they will grapple with two fundamental questions: how fast can China expect to grow, and what should they do to support that growth?
China has a second advantage. It has the potential to fuel robust growth with domestic demand—and not only household consumption. The country suffers no lack of investment opportunities, with significant scope for industrial upgrading and plenty of potential for improvement in urban infrastructure, public housing, and environmental management. Moreover, with low government debt and private savings that amount to 50 percent of GDP as well as $4 trillion of foreign reserves, it has the resources to fund those investments. Even under comparatively unfavorable external conditions, China can rely on investment to create jobs in the short term; and as the number of jobs grows, so will consumption.
As policy makers plan for the next five years, they should set China’s growth targets at 7 to 7.5 percent, adjusting them within that range as changes in the international climate dictate. Such a growth target can help to stabilize employment, lower financial risks, and achieve the country’s goal of doubling incomes by 2020.