China begins pivot to consumption driven economy
Paget DeFreitas, Editor - Overseas Publications
In the face of a slowdown of global demand for its manufactures, domestic consumption is this year driving growth in China.
Beijing officials suggest this is evidence of the deepening success of a restructuring strategy to lessen its reliance on foreign markets and put it in better shape to absorb shocks like the global meltdown of four years ago that weakened exports.
For the first nine months of this year, China's economy grew 7.4 per cent, and on track to meet the government's target of 7.5 per cent for 2012. The growth was despite a five per cent decline in exports, meaning that most of the expansion in GDP came from domestic demand.
"China has set developing internal consumption as its strategic base point, to leave space for the stable and relatively rapid expansion of China's economy," Zhang Ping, the chairman of the country's National Development and Reform Commission (NDC), told reporters last week.
Workshop to the world
Said Zhang: "The Chinese economy is now driven jointly by consumption, investment and exports."
For decades, China's exports, which earned it the nickname 'workshop to the world', fuelled double-digit growth and the country's economy to being the world's second largest.
But analysts warned that this heavy skewering of China's output to external markets carried downside risks, especially during periods of recession.
It is those risks that materialised in the face of the financial melt-down of forcing China to accelerate efforts at reform - an issue that is on the agenda at the 18th congress of the Communist Party of China (CPC), during which the once-a-decade shift in the country's leadership will take place.
Hu Jintao, the outgoing general secretary of the CPC, who will step down as president early in the new year, told last's week opening of the conference that there was a need to make the Chinese economy "more demand driven", along with other strategies for "accelerating the change to the growth model".
Zhang argued, essentially, that the process is well under way, with final consumption contributing 55 per cent to China's growth in 2011, up from approximately 44 per cent in 2002.
The contribution of capital formation, on the other hand, increased by only 0.3 percentage points, to 48.8 per cent.
Indeed, while state ownership will remain the mainstay of China's economy, the Communist Party has encouraged a deepening of private participation. According to Zhang, private firms now "contribute 60 per cent of gross domestic product, pay 50 per cent of taxes and create 70 per cent of the jobs".
However, some analysts here say that figures like these mask other underlying structural problems in the economy, such as a state banking system that is driven more by policy than the market and is overly partial to state-owned enterprises.
The upshot, these analysts claim, is that private firms, especially small and medium-sized enterprises, may find it hard to access affordable credit - a problem exacerbated by the fact that the country's financial market is, as yet, not well developed.
Private companies often go to the so-called 'shadow banking sector' and pay much higher rates than what obtains in the formal or official system.
However, Zhou Aiaochuan, governor of the People Bank, says that it is a matter to which China has to pay attention; the problem may not be as deep as claimed.
"Shadow banking is inevitable when banks are developing their business. But there are fewer problems here than the shadow banking sector in some developed countries that have been hit by the global financial crisis," said Zhou.
Sound banking system
Shang Fulin, chairman of the China Banking Regulation Commission, says the banking system in China is sound and that the banks are looking for business overseas, especially as the yuan increasingly becomes convertible.
"The bank systems risk is under control and non-performing loan ratio of 0.97 per cent is now low," said Shang.
Lending is not concentrated on high-risk projects and most loans have mortgage guarantees.
Hu urged the new leadership of the party and government to move quickly on the development of the capital market.
The depth and pace of reforms are likely to be reflected, analysts say, in who joints Xi Jinping, the incoming general secretary, in the top leadership of the party and the government.
In the meantime, there are signs that China is already moving to consolidate and deepen its capacity for higher domestic consumption, while enhancing market efficiency.
For instance, a plan has been introduced to, among other things, promote "mergers and acquisitions".
The wealth and social well-being of the Chinese people are also on the rise. Over the past decade, for instance, the total number of employed people jumped by more than 31 million to 760 million, and unemployment has been steady at under 4.3 per cent.
The social security system has been expanded, subsidised houses are being built and occupied and people's incomes have risen.
"Per capita disposal income for urban households increased by 183 per cent from 2002 to 2011, and per capita net income for rural residents by 182 per cent," said Zhang.