China’s Domestic Consumption Ambitions

By Friday, April 13, 2012

China’s growthChina is set to announce its first-quarter gross domestic product (GDP) today and, trust me; there is global interest in the result. A weak result and speculation will swirl that the country will face a “hard landing,” which is not what the world wants to hear and could start a domino effect globally.

A month ago, Chinese Premier Wen suggested that GDP will come in as low as 7.5% this year in the worst-case scenario. The World Bank predicts growth of 8.2% this year—a 13-year low and down from an 8.4% estimate in January. For 2013, Chinese GDP growth is estimated at 8.6%.

Of course, the 7.5% estimate by the Chinese is on the conservative side and clearly is a move by the government to make sure the actual reading comes in well above to show the country is strong and can deliver. This is the kind of economic propaganda you find in China.

The stalling is also expected to spread to China’s neighbors. GDP in East Asia and the Pacific Rim is estimated to stall to 7.8% this year, versus 8.2% in 2011. The numbers continue to look strong relative to the other G8 countries, including the U.S. and Canada. Longer-term, China and India will be key players in Asia, which I discussed in Chindia: The Place to Be for Growth in the Future.

The important issue is whether the Chinese economy will have a “hard” or “soft” landing. The reality is that the country’s exports are declining, as the global economies continue to face growth issues. There is also a decline in domestic consumption, which is a key area the Chinese want to address and improve. The current structure of China’s growth is largely dependent on foreign demand for goods, but China wants to drive domestic consumption higher in order to help minimize the negative impact of any global slowing.

China has made its intentions to pump up the Chinese economy with stimulus and avoid a hard landing clear. With Chinese inflation ratcheting down from the five percent level last year to the estimated 3.2% for this year, well within the target band, the Chinese have much more wiggle room to try to increase domestic consumption and halt the slide.

The country introduces new plans every five years. In 2011, China put forth the 12th “Five-Year Plan” for 2011 to 2015, which was aimed at making the country less dependent on export demand and investment-led growth and trying to promote equal income distribution to allow its lower income citizens greater access to money.

Part of the plan entails the building of 36 million new “affordable homes” in China by 2015. Can you imagine that? That would be great for the concept of income distribution.

The hope is that the strategy would increase domestic consumption, which currently stands at around a third of China’s GDP, compared to around 70% in the U.S.

In view, the concept seems workable and makes sense. Call it a sort of income aid or welfare, which is prevalent in the industrialized countries. You just want to make sure the plan does not result in a steady and continued stream of handouts.

About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »