China, Pivoting From Exports, Struggles To Boost Domestic Consumption

 @ibtimes on April 03 2012 2:46 PM

China's government is putting increased emphasis on promotion of domestic growth as continued poor performance of the global economy threatens Chinese exports. 

Vice Premier Li Keqiang told an audience at the Boao Economic Forum that strengthening domestic demand is a primary task of the country's strategic economic readjustment. 

In the face of falling exports as a percentage of its economy, China is trying to get its citizens to overcome a long-held propensity to save to a greater degree than most Westerners and instead to spend more on consumer goods. 

The Boao gathering, held on southern Hainan Island, is a yearly conference on the Asian economy hosted by China that attracts economic, political and business leaders from around the world.

Rebalancing Act

Figures from the World Bank show that exports as a share of the Chinese economy are falling markedly -- to just 29 percent of gross domestic product in 2010 from 39 percent in 2006.

Nevertheless, experts still aren't convinced China can redirect its economy from an export-dominated system to one driven by internal demand. Chinese families are hesitant to spend for a variety of reasons. Between 1990 and 2010 the saving of household disposable income rose from 16 percent to more than 30 percent. 

Savings in 2010 were equivalent to more than 50 percent of China's GDP.

That contrasts sharply with other major economies, where consumer spending makes up most of GDP. In the United States, for example, consumers account for 70 percent of the national economy.

The high cost of education, astronomical rates for health care, rising real estate prices, fluctuating food prices and a traditional propensity for the middle and lower classes to save remain major hurdles to how the Chinese think about consumption. 

Li's comments on continuing the shift to domestic demand in order to transform China's economic development mirrored those by Premier Wen Jiabao earlier this year at the National People's Congress. 

In March, the government boosted spending on social services and health care, and improved wages for the middle and lower classes. Beijing also wants to expand consumer credit to entice citizens to spend more.

The Commerce Ministry also launched a monthlong consumption-stimulus program Monday to compensate for declining exports. At least 80,000 private companies are set to join the initiative.

The vice minister for commerce, Jiang Zengwei, said, The global economic situation remains unclear, so domestic consumption should play a more important role in powering the economy.

From
From the World Bank’s April 2011 Quarterly Update on China.

Millions More In Cities

Vice Premier Li also said continued urbanization would make a major contribution to domestic demand. 

According to Zheng Xinli, vice chairman of the China Center for International Economic Exchange, each new urban dweller would drive a further 100,000 yuan (about $15,900) worth of infrastructure investment.  Each additional percentage-point increase in urbanization means over 10 million more rural residents becoming city dwellers in China, he said. Just over half of China's population lives in urban areas today.

In early March, the government projected economic growth targets of 7.5 percent, inflation targets of 4 percent, and the creation of 9 million new jobs over the next year.  Although 7.5 percent is a lower GDP growth estimate than in previous years, many foreign and Chinese observers believe this indicates the government is continuing its effort to prevent the economy from overheating.

Li also mentioned a need to boost China's comprehensive innovative prowess by advancing institutional, technological and management innovation.

Domestic and international concern about China's food safety and environmental degradation remains serious. Li said improvements in both areas and the modernization of agriculture would also help increase domestic demand.

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