China’s new path indicates crucial role of consumersComment on this story
Last week’s decision by Fiat Chrysler to expand production of Jeeps in China reflects the growing enthusiasm of Chinese consumers for cars. Announcing its plans in a press release on Saturday, the company said: “China continues to be the largest Jeep market outside of the US with nearly 60 000 Jeep vehicles sold in 2013.” And it noted Jeep sales in the world’s second biggest economy rose 29 percent last year.
Retail sales figures from China’s National Bureau of Statistics showed the biggest item on China’s retail bill last month was vehicle sales worth 2.7 billion yuan (R4.5bn), followed by petroleum and related products at 1.7 billion yuan.
Food, beverages, tobacco and liquor trailed at 1.2 billion yuan.
With support from their government, the thrifty Chinese are changing their habits. While they haven’t stopped saving they have started spending. A surge in household consumption last month seems to have offset a 6.6 percent slump in the country’s exports.
Retail sales, a proxy for household spending, jumped 12.2 percent year on year, up on growth of 11.8 percent in the two previous months. With inflation stripped out, real retail sales growth in March was 10.8 percent.
Another set of figures released last week showed the benefits: China’s gross domestic product (GDP) rose 7.4 percent in the first quarter compared with the same quarter last year. This was down from 7.7 percent notched up in the previous quarter but higher than the 7.1 percent expected after the recent weak export data.
The surge in spending was strongest in the case of communication appliances and furniture, both up 18 percent year on year. This was followed by growth in vehicle sales, up 14 percent, and household appliances and traditional Chinese and western medicines, both up 13 percent.
The data highlight the role of consumers as the Chinese government attempts to change the shape of the economy.
Traditionally China’s growth has been powered by government investment in the real economy – a good thing until the point at which roads, subways and bridges are underused and buildings stand empty – and by revenue from exports. While investment is a vital ingredient for growth, too much investment can be as wasteful as too much consumption. And exports depend on sustained demand in other parts of the world.
This risk, previously underrated in China, was demonstrated by the impact of the 2008/09 global recession. China’s GDP growth slowed sharply from the double-digit levels seen previously, when the advanced economies cut back on their own consumption.
Slowing exports confirmed concerns that China’s meteoric growth was unbalanced. With household consumption contributing only about 35 percent of GDP – compared with 60 percent in most economies including South Africa’s – growth in the economy was too dependent on external demand. And China’s government acted to create more balance by boosting local consumption.
But tightening credit policies saw retail sales growth slow last year from highs of about 15 percent in 2012. A recovery to 13.7 percent by December last year was followed by slower expansion in January and February. But many analysts still expect the share of household consumption in GDP to rise to between 45 percent and 50 percent by 2020.
Not that investment is taking a back seat. Reuters reported a few days ago that China’s fixed-asset investment – a main growth driver – accelerated an annual 19.6 percent last year, while retail sales rose only 11.3 percent. But this year China will target 17.5 percent annual growth in fixed-asset investment and a 14.5 percent expansion in retail sales growth.
The shift in focus will be a setback for commodity exporters like South Africa and Africa as a whole. However, there will soon be spillover effects. For instance, as the EU recovers from its prolonged recession, with the help of increased demand for its goods from China, the region will start importing more from the rest of the world, including South Africa. And, unlike China, the EU does import South Africa’s manufactured goods.
South Africa’s growth correlates closely with global growth, which means that anything that is good for the world is good for the local economy. The long-term benefit of China’s reforms will be a more sustainable growth path – even though at a more moderate rate than in the past. Much better for China and the rest of the world than a boom and bust scenario.