Domestic Consumption Will Become The Most Important Engine Of China'S Economy

Coach announced last Wednesday that it plans to increase its number of Chinese stores by 40% by 2012.

And the United States.

Can domestic demand also provide impetus to China's economy? In the first 10 months of this year, the total retail sales of consumer goods in China increased by 17% over the same period last year. This strong growth shows that domestic consumption will become the engine of China's long-term economic growth.

This is very important, because the other two pillars supporting China's economic growth are facing difficulties.

Export growth, which has been driving China's economic development in the past 30 years, is declining, especially as Europe, as China's largest export market, faces many difficulties.

Investment (about 87% from the government) may also make up for the lack of export growth, but government spending has already exceeded the point of diminishing marginal returns (that is, the marginal revenue from further increase in government spending will diminish).

Last year, China's domestic consumption accounted for 33.8% of gross domestic product (GDP), which is absolutely the lowest in all countries in the world.

Obviously, there is still a huge room for domestic consumption to play a bigger role in China's economy.

In fact, over the past 5 years, Chinese leaders have been talking about the need to readjust the Chinese economic structure and increase the proportion of consumption, and have taken a series of measures in this regard.

For example, they provide subsidies for consumers to buy appliances and cars.

However, as we have seen in other countries, when the Chinese government ended these encouraging subsidy policies, sales of these commodities rapidly declined.

Although these directional subsidy measures are in the right direction, they have not produced the expected effect in readjusting the economic structure, because Chinese leaders have maintained the export growth model (in other words, anti consumption) mode of economic growth during the past 30 years of reform and opening up.

When the global economy was in trouble in 2008, Chinese leaders turned to rely on increasing government spending to make up for the decline in exports.

As a result, the Chinese economy, as prime minister Wen Jiabao has said, has become increasingly "unstable, unbalanced, uncoordinated and unsustainable."

This expression is impressive.

In the past 5 years or so, China's leaders failed to achieve economic restructuring. This shows that they will not take a series of bold measures to increase consumption when China's economy is suddenly down.

To increase consumption, they must change the pattern of economic growth they pursue. For example, let the RMB float freely and allow banks to compete for customers' deposits by providing market interest rates (i.e. interest rate liberalization), which means collecting market loan interest rates from state-owned enterprises, allowing workers to establish trade union organizations and demanding higher wages, and providing a significantly enhanced social security system.

Perhaps China's leaders are not ready to do anything else except the last one.

Unfortunately, the consumption downturn is the inevitable result of China's economic growth model, not just a rectified feature of the model.

Therefore, Vice Premier Wang Qishan said to us trade officials last month that no one should be surprised that the Chinese government will further "unbalance" the economy to avoid a "balanced recession".

In the current economic downturn, the prospects for consumption growth are not particularly good.

There are three aspects that need close attention.

First of all, despite the fact that China's real wages have increased by 12.5% every year in 10 years, the proportion of consumption in China's economy is declining, so we have to find out what changes will take place in the face of shrinking domestic and external demand and employers who are losing productivity.

Second, following the "extraordinary boom" of real estate in the country, housing accounts for half of China's household wealth.

However, housing prices began to weaken in September and fell sharply in October, and maintained a downward trend in November.

Whether or not there will be a crisis of confidence, the rapid decline of real estate values will inevitably produce a negative wealth effect, thereby weakening consumption.

Third, more and more analysts are changing their minds and agree that the Chinese government will lower interest rates next year.

Song Yu, an economist at Goldman Sachs Group, said: "in view of the slowdown in economic growth, demand will be set to a ceiling, and inflation will decline in the coming months."

He expects China to lower interest rates as early as the second quarter of next year.

Of course, interest rates on deposits are likely to drop as loan interest rates fall, thereby further reducing household income.

There is no doubt that the Chinese government will force banks to lend money to support the economy, like 2008.

Even if this trick can work this time, some people will have to pay for all the bad loans that will be generated in the future.

As Wall Street journal columnist Tom Orlik (Tom Orlik) points out, "there is no economic stimulus without cost in the world."

And we know who will ultimately pay for the stimulus measures launched by the Chinese government.

In the face of the fact that China's technocrats quietly adjust the capital structure of banks by keeping interest rates too low and exceptionally high interest rate spreads, it is very difficult to increase consumption.

However, economic contraction is conducive to consumption in a sense.

When exports decline, the contribution rate of consumption to GDP will naturally rise.

But this is not the prospect expected when it announced its plan for expansion in China.