China’s Economic Shifts - An Analysis

By M. Isi Eromosele

China has achieved remarkable economic development over the 30 years since it started the initiative of reform and opening-up in 1978. China’s annual real GDP growth averaged as high as 9.8 percent over the last 30-year period.

Behind this remarkable growth are domestic factors, such as that the expansion of the domestic agricultural sector and an initiative of reform and opening-up that grew township and village enterprises in non-agricultural sectors.

Later, an increase in trade due to the opening of the economy to the outside world realized further economic growth. China’s total trade value has expanded some 144-fold to $5.6 trillion.

In particular, the value of exports has grown remarkably since China joined the WTO in 2001, leading the country to replace Germany as the world’s largest exporter.

China it has posted a surplus every year since 1994, with the surplus amount continuing to grow. As of the end of 2010, China held the world’s largest amount of foreign currency reserves.

China’s nominal GDP expanded some 82-fold over the 30 years. China accounted for 6.2 percent of the global nominal GDP in 2011, becoming the world’s second-largest economic power, after the United States. The global presence of the Chinese economy is expected to grow further.

Impact Of The Global Financial Crisis On The Chinese Economy

The impact of the sharp slowdown of the global economy caused by the financial crisis has spread to China, which until now had maintained high economic growth. Although the Chinese economy posted growth in excess of 10 percent for five consecutive years, China’s real GDP growth rate in 2011 was 9.0 percent, falling below 10 percent for the first time in many years.

The effects of the slowdown in exports have spread to production and employment, fueling concern that deterioration in the employment situation may drag down domestic consumption.

 It should be taken into consideration that the slowdown in the Chinese economy is attributable not only to external factors related to the world economic crisis but also to

domestic factors, including the effects of the country’s credit-tightening policy.

On a region-by-region basis, economic growth slowed down significantly in coastal areas that depend heavily on exports, including Shanghai and Guangdong Province (Tianjin is the exception because of the many investment projects that are ongoing in the Tianjin Binhai New Area).

On the other hand, the slowdown in growth was limited in inland areas and the central region because of their small dependence on exports compared with coastal areas.

Chinese Economy’s Dependence On Exports

An analysis of China’s economic structure in light of the ratios of investment, consumption and exports to nominal GDP will show that China has become increasingly dependent on exports in recent years compared with Japan and the United States.

As processing trade accounts for about 50 percent of Chinese exports, a slowdown in exports presumably produces a relatively large impact on the Chinese economy, although the unit export price and added value of Chinese products are lower than those of Japanese products, for example.

Since the Chinese economy also depends heavily on investment to enable the Chinese economy to achieve sustainable growth, it is necessary for the nation to establish a demand structure with well-balanced dependence on investment, consumption and net exports and to strengthen domestic demand by expanding consumption demand in particular.

Decrease In Exports Demand

Although the value of Chinese exports posted growth in excess of 20 percent every year between 2002 and 2010 after China joined the WTO, it fell as much as 25.7 percent by February 2010 on a year-on-year basis.

The decline in exports was due in large part to shrinkage of demand from developed countries caused by the world economic crisis and the ensuing decrease in the supply of parts to other Asian countries.

A look at the destinations of Chinese exports by type of goods shows that about 60 percent of exports of consumer goods are bound for the United States and Europe, indicating that exports of such goods are susceptible to changes in demand from those regions.

While about 50 percent of exports of parts are bound for Asia, including Japan, about 60 percent of exports of consumer goods from Asia are bound for the Untied States and Europe. This indicates that Chinese exports of parts depend significantly on final demand from the United States and Europe.

Measures To Expand Domestic Demand With 4-Trillion-Yuan Investments

The Chinese government plan to implement a 4-trillion-yuan investment program by the end of 2012, centering on infrastructure development.

The fields of projects covered by the package are (i) construction of houses for low- and middle-income people as a social security measure, (ii) development of rural infrastructure, (iii) development of key infrastructures including railways, roads, airports and power facilities, (iv) promotion of medical and sanitary projects and culture and education-related projects, (v) development of the ecological environment, (vi) voluntary innovation and structural adjustments and (vii) post-disaster reconstruction in earthquake-hit areas.

These are seven of the fields of projects covered by the “10 Major Measures For The Promotion Of Domestic Demand And Economic Growth,” adopted earlier this year. When these measures were adopted, the budget allocations for infrastructure development projects such as the construction of railways, roads, airports and power facilities totaled 1.8 trillion Yuan, nearly half of the total investments.

The central government will bear 1.18 trillion Yuan of the 4-trillion-yuan investments under the economic stimulus package, with the rest to be borne by regional governments, state-owned banks and private companies.

Measures Taken By Regional Governments To Expand Domestic Demand

Following the announcement of the 4-trillion-yuan economic stimulus package, regional governments adopted investment plans one after another. Investments proposed by regional governments total more than 20 trillion Yuan.

It is notable that the governments in inland regions in the southwest, including the Sichuan province, the Yunnan province and Chongqing City, and coastal regions in the southeast including the Jiangsu province, the Guangdong province, Shanghai City and the Shandong province, proposed a particularly large amount of investments.

Inland regions, which were significantly affected by a slowdown in exports, presumably because they are the homes of migrant workers working in coastal regions, drew up active investment plans just like coastal regions.

Trends In China’s Consumption Market

Total retail sales of social consumer goods in 2010 amounted to 10.8 trillion Yuan, which

represented a year-on-year growth of 21.6%, higher than the previous year’s rise of 16.8%. However, on a monthly basis, after peaking in August and September 2010, growth in total retail sales of social consumer goods slowed down due to the impact of the world economic crisis. Consumption fell more steeply in coastal areas than in the western and central regions.

A comparison of the trends in consumption in urban areas and rural areas shows that although growth in the former previously exceeded growth in the latter, this pattern has been reversed since November 2010.

In March 2011, consumption in urban areas posted a year-on-year growth of 13.7%, a higher growth than in February and the highest growth since that of 10.9% recorded in December 2010.

Meanwhile, consumption in rural areas posted a year-on-year growth of 16.9%, the highest growth since that of 16.1% recorded in September 2010, confirming that consumption is growing more strongly in rural areas than in urban areas.

Toward Growth Based On Expanded Domestic Consumption

Although consumption of some products is growing, there are concerns over how an increase in the number of unemployed people and a slowdown in growth in wages will affect future consumption in China.

In order to enable the Chinese economy to grow in earnest, it is necessary not only to generate temporary effects through individual policy measures but also to achieve growth based on sustainable expansion of domestic consumption.

Additionally, while consumption in China is expanding, it still accounts for only a small portion of GDP compared with investment and exports. Therefore, in order to ensure that the Chinese economy continues sustainable growth, it is also necessary to change the country’s economic structure by expanding domestic consumption.

However, in order to further expand consumption in China, it is important to raise the income of the 820 million people who live in rural areas. The income level in urban areas was 2.4 times as high as that in rural areas in 2008, and the difference has been increasing since then, expanding to 3.3 times in 2011.

Although there is much room for a future expansion of domestic consumption, including an increase in the diffusion of durable consumer goods in rural areas, the consumption propensity, which represents the ratio of income used for consumption to the disposable income has been declining, indicating that more of income is being set aside for savings than for consumption.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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