10 China Myths for the New Decade- Myth #8: domestic consumption

Derek Scissors, Ph.D., Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, via http://www.heritage.org, January 28, 2010 –

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Myth #8: China is rebalancing toward more domestic consumption.

Truth: The dominance of investment over consumption in driving China’s economy is intensifying.

The PRC’s official trade surplus fell by $100 billion in 2009. The U.S. reports the bilateral trade deficit will also decline for 2009, though by a smaller proportion.[17] This will be hailed, correctly, as a welcome event and, incorrectly, as a sign that the Chinese economy is changing.

The trade surplus shrank because Chinese exports fell faster than imports. In other words, Chinese demand for foreign goods weakened, but global demand for Chinese goods weakened more. The major change occurred outside the PRC, as global demand faltered. In fact, Chinese market share is rising and China has passed or will soon pass Germany as the world’s top exporter.[18]

Inside the PRC, strong Chinese consumption has received much praise. Some is deserved: Chinese consumption has held up better than the rest of the world’s. Still, there are multiple reasons to dismiss this as a meaningful change.

Chinese consumption before the global crisisalso looked robust. But from 2003 to 2007–when the expansion induced under General SecretaryHu Jintao took place– consumption fell as a proportion of GDP every year. This is because investment was much larger and grew far faster in those easy times.

This is still the case in the tough times of 2008 and 2009: The role of consumption keeps diminishing compared to investment. Over the course of the last decade, nominal fixed investment expanded by a factor of 12. By 2009, fixed investment was close to twice as large as retail sales by volume, and still growing almost twice as fast.[19] By itself, fixed investment stood at no less than 67 percent of GDP last year and is still rising.

The view ahead is no more encouraging. It is widely hoped that internal Chinese demand will eventually drive imports higher. But demand has been as strong as could be reasonably hoped for throughout the crisis, and imports have dropped noticeably. Imports are tied tightly to exports via the PRC’s role as an assembly center in global manufacturing.

Worse, the extreme growth of investment during the financial crisis has added to the problem of oversupply. As total global demand has weakened, Chinese production capacity, driven by investment, has (perversely) expanded. That excess capacity will create even greater pressure to export in 2010 and beyond. (to be con’t)

– Original from The Heritage Foundation