China Aims to Drive Domestic Consumption

China Aims to Drive Domestic ConsumptionChina is currently facing a spending crunch from Europe and the U.S., which is impacting the Chinese economy and threatening a possible “hard landing.”

The superlative growth of China over the last decade has largely been fueled by export demand for cheaper Chinese-made goods. The country built thousands of plants and added significant capacity to handle the significant influx of foreign business. While this strategy works when global economies are strong, the problem arises when export demand declines as we are seeing now in China.

The current structure of the country’s growth is largely dependent on foreign demand for goods, but China realizes that it also needs to drive domestic consumption higher to help minimize the negative impact of any global slowing when moving forward, and to create a more balanced economy that is powered by both export demand and domestic consumption.

The International Monetary Fund came out earlier this week and suggested China’s economy is facing “significant downside risks,” advising the country to try to increase domestic consumption instead of just pumping money into the economy. If you go to China, you’ll notice tens of thousands of empty apartments that were built by the government with no tenants. You also see this with excess manufacturing capacity. China has spent hundreds of billions on infrastructure, but consumer spending is key.

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China has made it clear that it wants to stimulate domestic consumption, which currently stands at around a third of its gross domestic product (GDP) compared to around 70% in the U.S.

With over 1.3 billion people and a middle-class of around 300-400 million (depending on who you talk to), the strategy to boost domestic consumption makes a whole lot of sense.

In its 12th Five-Year Plan for 2011-2015, China indicated it wants to make the country less dependent on export demand and investment-led growth, and to try to promote equal income distribution that would allow its lower-income citizens greater access to money. This, in turn, would pump up domestic consumption, at least in theory.

The reality is that China’s exports are declining as the global economies continue to face growth issues. (Read “Global Economies Backtracking.”) There is also a decline in domestic consumption, which is a key area the Chinese want to address and improve.

China has made clear its intentions to pump up its economy with stimulus and make consumers want to spend. Interest rates have been lowered, and with inflation well below the top target, there is more room for rates to fall.

The hope is to make it so attractive the Chinese consumer will want to borrow and spend.