Rebalancing China’s Economy: More than Just Numbers

Customers at a supermarket in China. (Photo: BusinessForum China)

Over the past thirty years, China’s GDP has soared from $140 billion to nearly $6 trillion. This phenomenal growth has been sustained at double-digit rates largely through a reliance on exports from heavy industry. Recently however, slow growth in the US and a renewed crisis in Euro zone countries have shown China that it cannot count on exports forever. The new leadership, headed by Xi Jinping, must now oversee a transition to an economy that relies on domestic consumption over export based industrial production.

With the world’s largest population one would think domestic consumption should not be difficult to achieve. Wang Shiling, who runs a mall in Linyi, perhaps put it best when he said, “people still need to consume living necessities. Toothpaste, notebooks, basins, you name it. Don’t forget that China has 1.3 billion people!” Even with such a large population though, domestic consumption only constitutes about 37% of China’s economy (the rate in developed countries is closer to 70%).

Economic indicators also suggest that China is on the path to rebalancing the economy. Since 2009, wages have been on the rise while government stimulus packages have focused on infrastructure and construction, which not only employ workers but aid the movement of goods and services throughout the country.

For all this though, China still faces many barriers to growing domestic consumption. The average Chinese may be earning more than before and stringent restrictions on the financial sector have recently been (ever so slightly) relaxed, but rebalancing the economy is about more than salaries and interest rates. In order to spur wider consumption, the government must reform current policies to encourage citizens to spend more and local businesses to expand productivity.

A prime example is the country’s hukou system through which citizens are typically registered in their birth town. Under this system, Chinese may only obtain public services such as healthcare and education in the location they are registered. This becomes a major factor for the nearly 170 million migrant workers who leave their rural villages in search of better economic opportunity in the cities. With no access to public services, they tend to save a large portion of their earnings in case of emergencies. The hukou places them in a precarious place and prevents them from spending on consumer goods other than basic living necessities.

The state of China’s property markets is another challenge to expanding the domestic economy. Weak property rights create a sense of insecurity that stifles the development of small and medium enterprises. Under the constant threat of being evicted from their premises, small businesses are hesitant to invest in immovable property. When land grabs and forced evictions occur, owners typically lose their equipment and are not properly compensated. The weak rule of law surrounding property markets forces most enterprises to operate at least somewhat informally, constraining their potential to expand.

Small businesses also require greater access to finance. Currently, the majority of loans are reserved for the large state-owned “national champions” of heavy industry. Freeing the financial markets from onerous regulation will allow entrepreneurs and small businesses to access loans to create new businesses or grow SMEs, in turn driving the domestic economy.

Examples such as these interact with each other to discourage increased domestic economic activity. They not only lead Chinese to spend less but push those who take the risk into the informal sector where their full potential cannot be recognized. Only by creating an environment that grants greater access to opportunity will China be able to reduce this economic informality and successfully rebalance the economy.