As China’s economic growth slows, 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 economy grew only 6.9 percent year on year.
As a result, some observers have concluded that the economy is in trouble, consumers are hunkering down and the next five-year plan must be dead on arrival.
In reality, the Chinese economy is rebalancing as expected. 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’
The country’s top leaders are expected to disclose an outline of the 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). 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.
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, marking the slowest growth since 2000.
In contrast, the service sector accounted for 51.4 percent of the 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 China increased to US$3.8 trillion — the same as the value of Germany’s economy — while Chinese tourists spent a record US$165 billion, an increase of almost 30 percent from the previous year.
This year, growth will be within the government’s “flexible 7 percent” target, around 6.8 to 6.9 percent. Next year, growth is likely to decelerate to 6.3 to 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 three to four times faster than the major advanced economies: the United States, the European Union and Japan.
Despite the deceleration of growth, China’s GDP per capita is expected to double within a decade.
The Chinese economy is still expanding, but living standards are rising even faster in relative terms — as they should.
– Contact us at [email protected]