Time and again, I see that the biggest challenge for China is to switch demand from net exports to a more sustainable model of domestic consumption. Can anyone expand on why this is so?
Well it makes them less dependent on the state of foreign economies, and I think this is the crux of the argument. Increased dependency on domestic consumption & less on exports will still lead to growth, albeit at a slower rate. History tells us the current rate is too high. See below. http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_kd_zg&idim=country:CHN&dl=en&hl=en&q=chinese+gdp+growth#met=ny_gdp_mktp_kd_zg&idim=country:CHN:USA I’m sure as incomes grow in China, domestic consumption will grow in tandem, thus reducing the dependency on exports for economic growth. They have 1/6th of the worlds population. The market is there, it just needs to start feeding itself.
Nice chart & explanation soddy, thanks a bunch. So it’s basically getting the ‘C’ to increase as ‘X’ falls from the AD/GDP equation: C+I+G+X. The impediment to increasing the ‘C’ is the high savings rate, which is to some degree based on there being no health system or pensions from what I can discern.
Well I think China is taking major steps to revamp its health care system. I suppose that the end result would be a reduction in the savings rate by the older portion of the population (this is obviously dependent on what the health care system involves). I’m not too sure about the workings of their system but if it is Govt. sponsored it would stimulate G & I along with increasing taxes. The following link is an old article, but it makes an interesting point about the “Made In China” brand. Although specific to health care, you should think to what other areas of the economy is the thesis transferable. If it is, it should help stem X. http://www.businessweek.com/globalbiz/content/aug2009/gb20090821_005732.htm
Balancing domestic consumption and export dose not solve the root of the problem: wealth distribution. China needs further economic reform. Consumer savings count for roughly 20% of total savings and the percentage has not changed since 10 years ago. What increased significantly is government and corporate (state-owned enterprises) savings. One move in China now is that the central government encourages SOEs to go public. One of the benefit (it might be a side-effect) will be that the SOEs can issue dividends to investors so the wealth can be transferred to the public. The health-care reform is great. So are some initiatives in agriculture. But more need to be done, such as fully-funding high-school education or even college education if they are worrying about investing in the dollar. I don’t think the Chinese are born to be frugal. They may just plan too well about the future.
Chinese ppl are not frugal. We are cheap. Just ask Russell Peters