Weathering The Trade War Through Consumption
Currently led by President Xi Jinping, China's sights have long been set on an economy less dependent on exports, and on one that draws growth from domestic consumption. This desire for economic independence from the rest of the world may be the key to withstanding the economic pressure created by the U.S.- China trade war.
The transition from an export-based to a consumption-based economy has been a long-held goal for the Chinese, something that they have been steadily edging towards over the past 10 years. This is evident in figures from the World Bank, which show that China's GDP derived from exports peaked in 2008 and have been on the decline ever since. Their success in achieving this is reflected in the data which shows that exports currently constitute less than 20% of their GDP. Contrasted to other nations such as Germany, who exports a total of 46% of GDP, China is well ahead of the curve when it comes to shifting the driving force behind their economy.
The most positive signal for the Chinese is the value of their consumption expenditure. This was just over $6 billion in 2017, which accounted for over 10% of global consumption expenditure, behind only the United States. Even so, China's GDP derived from domestic consumption in 2017 was only 39.1%. Contrast this to 68% in the U.S. and 62.2% in India and it is clear that there is incredible potential still remaining for consumption growth within their own borders.
The Chinese will be relying on this shift towards consumption-based growth to pick up any slack from the effects of U.S imposed trade tariffs. Growth in consumption has been further facilitated by Beijing's recently announced 13 measures to build a vibrant 'night economy' and encourage consumer spending. Among these measures are the extension of shopping hours in tourist areas and the development of night shopping markets in all 16 of the city's districts.
As an indicator of the current consumer power in China, the annual Single's Day e-commerce and entertainment festival was a resounding success. The gross merchandise value sold in the 24-hour period by Alibaba alone was $38.3 billion - a 26% rise from the previous year. So strong was the Chinese power to purchase, that Alibaba sold more in that single day than Amazon does in a two month period.
Part of this Singles Day success and Chinas strong drive towards a consumption-driven growth model is the so-called “invisible poor” - a new term used to describe young Chinese white-collar workers putting themselves into debt through excessive consumption in a bid to exhibit wealth. Expensive suits, top of the range wines and apartments costing them more than half their monthly salary are some of the prized purchases of these consumers. This socio-economic shift taking place from being a nation of savers to a nation of spenders is a long-term concern for Chinese economists but is providing some short-term torque to the economy.
A bright light in China's economic future, no matter how long the trade war lasts, is the economic potential lying in their lower-tier cities. These cities that were previously excluded from greater participation in the economy are becoming increasingly more connected through both the Chinese government's increasing investment in transportation networks and the greater connectivity that 21st-century technology allows.
Economic growth rates in these cities are higher than those in the top tier cities; for example, Beijing and Shanghai both experienced a growth rate of 6.6% in 2018, whereas the lower-tier cities of Chengdu and Xi'an managed to reach 8% and 8.2% respectively. Strong economic growth rates coupled with increasing connectivity of these cities will allow for pent-up economic demand to be released, further supporting the Chinese economy.
Although in the depths of one of the most significant trade wars in recent history, China has put itself in a position to withstand the battle and come out largely unscathed. With their successful shift towards a consumption-based growth model and a mass of pent-up economic potential in their lower-tier cities, the Chinese growth story is as promising as it has ever been.