Can China Convert Itself into a Consumer-Based Economy?

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Includes: CAF, FXI, GXC, PGJ
by: David Hunkar

Investors worldwide are focusing on China as it has become the top-performer among the emerging markets year-to-date. Media reports have even mentioned China as the country that will pull the world out of the current global recession.

Until last year, China was mainly an export-driven economy. Overseas demand for all kinds of consumer goods kept the Chinese economy growing at a fast pace. However since the credit crisis and the recession adversely affected exports, China implemented a 4 trillion yuan ($706 billion) stimulus plan that concentrates heavily on infrastructure spending and raising individual consumption levels by individuals by offering subsidies for goods. However moving forward, will China be able to depend less on exports and convert the economy to be a consumer-based economy?

China is heavily dependent on exports as the chart shows below. During 2001-08, 60% of the GDP growth was related to net exports and investment in sectors related to trade - primarily manufacturing. This was an increase from 40% in the 90s. The estimated contribution of exports to GDP growth was about 30% for 2001-08, up from 15% in the 90s. The tremendous growth in exports lead China to account for 9 1/3% of global exports in 2008.

China

China has one of the highest investment rates in the world at about 40% of its GDP. The majority of the investments go into manufacturing, infrastructure and real estate. Manufacturing accounts for 30% of investments since exports of finished products require large investment in factories.

China-Investment-Rate

Source: IMF Working Paper, 'Is China’s Export-Oriented Growth Sustainable?' By Kai Guo and Papa N’Diaye

It will take a long time for China to retool its economy to stimulate domestic demand. As consumers in the developed world drastically cut down consumption of cheap imported goods, China’s exports will likely suffer more. China’s exports have been decreasing on a year-over-year basis for the past nine months. Compared to last year, exports were down 23% in July 2009.

The Chinese leadership is well aware of the task ahead of them in converting the economy into a consumer-based one as opposed to an export-driven one.

“The biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable.” Premier Wen Jiabao, National People’s Congress Press Conference, March 2007.