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Summary
One
issue will be particularly important in shaping the Chinese
government's approach to social and economic development over the coming
decade: transforming China's nearly 800 million workers (including some 250 million migrant laborers) into consumers. For a system that has reached the limits of an economic growth model that has underpinned social stability and regime security for more than 20 years, doing so is a fundamental political imperative.
Toward
this end, China's State Council on Feb. 5 announced a long-delayed plan
to help close the country's widening wealth gap by increasing minimum
wages to 40 percent of average provincial salaries. This initiative has
encountered enormous political resistance over the last decade, but it
reflects Beijing's shifting political, social and economic priorities.
Analysis
For
nearly 30 years, Beijing has relied on an export-oriented economic
growth model that has generated enormous capital and near-universal
employment. However, it often did so at the expense of efficiency,
productivity and purchasing power of ordinary Chinese workers. Now, as
domestic investment has become the main driver of economic growth and
demand for Chinese goods abroad has declined, the central government
senses that it must shift from this model to one grounded in a more robust and confident Chinese consumer base.
This
policy shift comes at a time when small- to medium-sized
manufacturers (some of China's largest employers) are already hurting
from weak external demand, rising input costs and limited access to
state-backed credit. When combined with the strong political resistance
that measures to increase wages and improve working conditions are
likely to meet from state-owned enterprises and municipal governments,
these conditions have put Beijing in a bind. On the one hand, the
central government recognizes that to stimulate domestic consumption it
must continue to raise wages while introducing other measures to boost
consumer confidence (such as increased access to health care and urban
social services, as well as affordable housing). On the other hand, it
knows that raising wages or implementing other reforms that would raise
the financial burden on manufacturers and local governments too quickly
could trigger a premature collapse in the manufacturing sector,
threatening Beijing’s primary social and political imperative:
employment.
The
need to rebalance the Chinese economy away from overreliance on exports
and state-led investment and toward greater domestic consumption has
underpinned most of the Communist Party's major social and economic
policies over the last decade, including inland urbanization and efforts to reform the household registration or "hukou" system.
This need likewise infuses public speeches by China's top policymakers.
Over the last two months, incoming Premier Li Keqiang has
repeatedly emphasized the importance of urbanization as the basis for
China's long-term economic stability. In a speech on Jan. 29,
Premier Wen Jiabao called for greater efforts to raise living standards
for China's rural poor. Li and Wen's speeches -- like much official
Chinese commentary on wages and working conditions -- frame the issue
indirectly, in terms of urban development, social welfare and income
inequality. But ultimately the target of their speeches -- like their
policies -- is China's weakening domestic consumer base.
A Unique Weakness
China
has by far the lowest domestic consumption rate of any major economy,
developed or developing. Last year, household consumption expenditure as
a portion of gross domestic product fell to 37 percent -- well below
those of India, Indonesia and Germany (all 57 percent), as well as
China's nearest East Asian peers, Japan (60 percent) and South Korea (53
percent). Neither Japan nor South Korea, even at the height of their
days of export-driven growth, ever saw domestic consumption dip below 50
percent of gross domestic product. In fact, the only countries with
comparably low household consumption rates are either tiny (Luxembourg
and Bhutan) or rely almost entirely on energy exports (such as
Azerbaijan).
China's
domestic consumer base is uniquely weak relative to its economy -- the
opposite of Beijing's largest trading partner, the United States, where
consumption equals 72 percent of gross domestic product. Most troubling
for China's new leaders, however, is that over the last decade Chinese
household consumption has declined in perfect lockstep with the
expansion of the economy as a whole.
In
2000, household consumption equaled 47 percent of China's gross
domestic product, compared with exports, which made up 23 percent of the
gross domestic product. Six years later, consumption's contribution to
the gross domestic product had fallen to 35 percent, while that of
exports had risen to 39 percent. When the 2008 financial crisis struck
and external demand for Chinese goods dried up, exports' contribution to
gross domestic product inevitably began to fall. But recognizing that
Chinese consumers were in no position to make up the slack from
declining exports (especially now that many of them faced possible
unemployment), Beijing in early 2009 launched an emergency stimulus
plan.
The
depth of China's dependence on U.S. and European consumer demand prior
to 2008 is best illustrated by the enormity of Beijing's response to the
sudden evaporation of that demand. Between 2008 and 2010, the central
government pumped as much as 27 trillion renminbi ($4.3 trillion) in
credit into the economy. Most of that went to infrastructure development
and property construction, which soon emerged as key drivers of
economic growth (amounting to 46 percent of gross domestic product in
2009). But if the key long-term aim of stimulus spending was to lay the
urban infrastructural foundation for eventually building a robust
domestic consumer base (first on the coast, then inland), the immediate
effect was to push consumption expenditure's share of the economy lower
than it ever had been at the height of the export-driven growth model.
Throughout 2009 and 2010, domestic consumption hovered at 33 to 34
percent of gross domestic product, despite massive gains in minimum
wages over the previous decade.
Beijing's Logic
For
most of the last decade, China's weak domestic consumer base was not a
major source of concern for Beijing. In fact, it was a direct byproduct
of central government policies designed to enhance the export economy.
For Chinese policymakers, weak per capita consumption and a robust and
competitive export sector were two sides of the same coin. Having a
strong consumer base would have necessitated higher disposable incomes
relative to cost of living (as well as a host of urban social services,
thereby putting immense fiscal burdens on coastal municipal
governments), and that would have meant significantly higher wages. But
high wages were anathema to China's growth model, which was grounded in
the ability of coastal manufacturing to undercut any producer of
low-cost goods in the world.
Sustained
competitiveness in exports meant two things for Beijing: capital
inflows (in the form of trade surpluses with China's major export
partners, as well as savings deposits from coastal workers) and
employment. Continued expansion of the export sector provided more room
to absorb surplus labor from the interior,
while the unending flow of cheap, young labor from the interior
guaranteed continued growth and competitiveness in the export
sector. Declining average household consumption expenditure (as a
reflection of low wages, high savings and abundant labor) was seen as an
acceptable temporary price to pay for an otherwise successful economic
model. That model served a concrete economic end -- the accumulation of
capital by the state -- and enabled Beijing to maintain its promise of
employment and a modicum of prosperity to the Chinese people.
Now,
however, with China unlikely to regain its title of "workshop of the
world" even if the Party's ambitious plan to transform the interior into
a new manufacturing and industrial base comes to fruition, Beijing is
trying to move away from this model. It does so under extreme
constraints -- most notably, resistance from China's vast and entangled
state-industrial complex, which has little interest in giving up control
of the country's key sectors. Even if Beijing is able to break
the state sector's monopoly on lending and spending -- for example, by
liberalizing capital controls and expanding individuals' and private
businesses' access to credit -- it faces a far more deep-set problem: a
social and cultural disinclination to spend beyond one's means.
Generating a truly widespread consumer culture in China will take more
than higher wages and access to social services or housing. It will take
time.
Copyright STRATFOR GLOBAL INTELLIGENCE
February 6th, 2013.
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