Can China Convert to a Consumer-Based Economy Successfully?

Investors worldwide are focusing on China as it has become the top-performer among the emerging markets year-to-date. Media reports have even mentioned China as the country that will pull the world out of the current global recession.

Until last year  China was mainly an export-driven economy. Overseas demand for all kinds of consumer goods kept the Chinese economy growing strong.However since the credit crisis and the recession adversely affected exports,China implemented a 4 trillion yuan ($706 billion) stimulus plan that concentrates heavily on infrastructure spending and raising consumption levels by individuals by offering subsidies for goods. However moving forward will China be able to depend less on exports and convert the economy to be a consumer-based economy?. Nobody knows the answer for sure.

China is heavily dependent on exports as the chart shows below. During 2001-08 60% of the GDP growth was related to net exports and investment in sectors related to trade primarily manufacturing. This was increase from 40% in the 90s. The estimated contribution of exports to GDP growth as about 30% for 2001-08 up from 15% in the 90s. The tremendous growth in exports lead China to account for 9  1/3% of world’s export in 2008.


China has one of the highest investment rate in the world at about 40% of GDP. The majority of the investments go into manufacturing, infrastructure and real estate. Manufacturing accounts for 30% of investment since exports of finished products require large investment in factories.


Source: IMF Working Paper, Is China’s Export-Oriented Growth Sustainable? by Kai Guo and Papa N’Diaye

It will take a long time for China to retool the economy to stimulate domestic demand.As consumers in the developed world drastically cut down consumption of cheap imported goods, China’s exports would suffer more. China’s exports have been decreasing on an year-over-year basis for the past nine month.Compared to last year, exports was down 23% in July 2009.

The Chinese leadership is well aware of the task ahead of them in converting the economy to be consumer-based as opposed to export-driven.

“The biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable.”
Premier Wen Jiabao, National People’s Congress Press Conference, March 2007.

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