THE PATH TO CONSUMPTION IN CHINA

CHINA NEEDS MORE REFORMS TO MAKE A CONSUMPTION-DRIVEN ECONOMY

Jonathan Woetzel, Lillian Li and William Cheng

Shanghai Daily, November 27, 2012

CHINA'S economy is starting to shift to a more consumption-driven and service-driven model that should help to sustain the country's growth, albeit at a slower rate, over the next decade and beyond.

Over the past two decades, the growth in China's GDP has been largely powered by investment by government and the corporate sector - primarily state-owned enterprises that retained or reinvested their relatively high returns on investment.

Investment has increased at such a fast rate that although household income has risen consistently over the period since 1990, as a percentage of GDP, it has fallen from 70 percent in 1990 to 57 percent in 2011. However, our projections suggest that within the next five years, the household income share of GDP will start to rebound.

Three drivers
We see three drivers for this acceleration in household income growth.

First, wages are likely to rise due to government policies and structural changes in the labor market. Policy makers have set a clear target that per capita disposable income should rise at least as fast as GDP in the 12th Five-Year Plan. The main steps are focused on increasing minimum wages and the reference wage.

Supply and demand dynamics are pushing in the same direction as government policy. China's labor pool is shrinking due to demographics and a reduced flow of migrant labor from rural areas, and this is exerting upward pressure on wages.

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