Consumption spending is booming in China, according to the Economist magazine. Rising household income is fuelling spending in the retail sector, which has grown 10.5% in the last year. This may even be an underestimate as it does not include service sector output.
Since retail sales are growing faster than the overall economy (officially around 7%), this is contributing to a rising share of consumption in overall output and a falling share of saving. While Chinese industrial output is falling, the service sector is still growing.
These trends mean that the Chinese economy is rebalancing away from extremely high savings and investment rates, and towards consumption. Many commentators have argued that this is exactly what is needed in order for China to continue its development and avoid the middle-income trap which many developing nations have fallen into, in which catch-up growth stalls and the path to rich country status eludes them.
Chinese growth is slowing overall, but having grown at around 10% for the best part of 30 years, this seems inevitable. If household incomes continue to rise even while growth slows, the country may avoid major social unrest, and the government is likely to retain its legitimacy in the face of a continual improvement in living standards.
If the excess of domestic savings over investment falls, then China’s current account surplus will shrink, reducing the deflationary effect that the current pattern of growth has on the rest of the world. Some economists have argued that the large surplus led to an export of capital that fuelled credit binges and created asset bubbles in the US and elsewhere, ultimately leading to the 2008 financial crisis and recession. China’s rebalancing will help to reduce the likelihood of further such crises in the near future.
This rebalancing is not good news for everyone. Economies dependant on commodity exports are suffering as Chinese industry contracts and reduces its need for imports of raw materials. Commodity prices have fallen sharply this year, and key exporters such as Brazil are now in recession. With lower investment and higher consumption growth in China likely to continue for some time, along with a shift in consumer demand from industrial products to services, global trade growth dependant on the previous development pattern will not be sustained. Indeed, it has been growing more slowly than global output since 2008, as Duncan Weldon has pointed out. Some of this may be due to a ‘China effect’.
China’s consumption boom is part of a necessary rebalancing of its economy. It will reduce one of the key drivers behind the accumulation of private sector debt in many countries, which precipitated the 2008 crisis. It will also allow it to continue its remarkable development, although at a slower pace than before.
All capitalist economies go through continuous restructuring, as resources shift from less to more profitable activities, and this allows productivity and output to grow. Inevitably there are winners and losers in this process. In China, retail and service sector workers are currently benefiting, while factory workers are suffering. This adjustment is necessary, but as with much of the change that occurs under capitalist development, the distribution of costs and benefits remains uneven.