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Consumption is the key for sustainable growth

By Huainan Zhao (chinadaily.com.cn)
Updated: 2009-04-17 16:36

Huainan Zhao

Government figures show that China's economy grew 6.1 percent in the first quarter, which was the lowest quarterly GDP data of China since its first publication in 1992. In comparison to the 10.6 percent growth rate same time last year, the recent figure was nearly halved. However, given the current status of the world economy, Premier Wen Jiabao was relieved and pleased with the growth rate and expressed optimism for the Chinese economy.

To take a closer look, the sharp decline of the GDP growth rate was mainly driven by the slow down in China's exports, which was down 19.7 percent compared to the 1st quarter last year. Given exports represent about 40 percent of the GDP, it's not difficult to understand why the f first quarter GDP growth rate has dropped so dramatically.

To counter the negative impact of diminishing exports, the Chinese Government has (since last November) taken aggressive steps to stimulate the economy. From the first quarter data we have also seen that investment, which is another major engine and accounts for about 40 percent of the China's GDP, was up 28.8 percent, which includes a 102 percent increase in infrastructure investment, 87.7 percent increase in new investment projects started in the first quarter. Domestic consumption, which contributes about 30% to the GDP, was up 15 percent in the first quarter.

Related readings:  Waking up domestic consumption  Higher income fuels consumer spending  Survey hints at tendency to spend more  China to boost spending on welfare, healthcare

As can be seen, the negative impact of weak exports has been largely offset by the boosts in investment and consumption. Given the current status of the world economy, the Chinese government does not expect a quick recovery on its exports. Investment and consumption will continue to play the big role while the world economy is weak. However, the 28.8 percent year-on-year investment growth rate was 4.2 percent higher than the same time last year when the economy was growing at 10.5 percent. Though the investment growth rate could be higher than 28.8 percent in the following quarters, it is unsustainable and will almost certainly leads to waste and overcapacity.

Thus, given exports will be weak for a certain period of time and investment at current pace is unsustainable, the only durable approach is to boost the weaker domestic consumption which contributes far too little to the economy (30 percent+ compared to 60 percent+ of western countries).

In contrast to Western countries, Chinese households, corporations, and government all hold large savings; rather than trying to save more in these turbulent times, it is time to take the opportunity to address the prolonged weak consumption problem. A series of reforms must be implemented to unlock the everhigh savings and to encourage domestic consumption. Only then will the Chinese economy enter onto a sustainable path for future decades, which is good for both China and the world.

The author is a lecturer in Finance at Cass Business School, London and a visiting professor of Finance at Renmin University of China. Before joining Cass in 2006 he taught at Durham University Business School for three years. His research and teaching interests are in Corporate Finance, Corporate Governance, and Mergers & Acquisitions.