China's Consumer-Driven Economy

Over the past 18 months, the Chinese economy has defied expectations of a slowdown as it managed to record healthy rates of growth throughout that period.  Instead of a slowdown, the Chinese economy has managed to hold steady at a rate of growth that is the envy of most of the world’s other large economies.  Moreover, while the uncertain outlook for trade and investment has dampened enthusiasm among Chinese exporters, the fact is that, so far, export growth in China has remained relatively strong.  However, it is consumer spending in China that is now the key driver of the country’s economic growth.  This is due to the fact that, for the past 40 years, the Chinese economy has expanded at an average rate of 9% per year, allowing wealth levels in China to rise dramatically.  In fact, China is now home to large and expanding upper and middle classes and this is driving the remarkable increase in consumer spending that has been seen in recent years.  Sure, China still faces a number of threats that could bring an end to this run of strong growth, particularly its growing debt problem and the threat of a global trade war.  Nevertheless, the recent performance of the Chinese economy will raise hopes that a sharp downturn can be avoided and that China will continue to record some of the world’s highest rates of economic growth.

In the first quarter of this year, the Chinese economy expanded by 6.8% on a year-on-year basis, a slightly higher rate of growth than had been expected.  In fact, this was the same rate of growth as China recorded in the second half of last year, a rate of growth that appeared to be unsustainable over a longer period of time.  Instead, consumer spending in China continued to rise at a very strong pace in the first quarter, defying expectations of slower growth during that period.  In fact, domestic consumption accounted for nearly 80% of China’s economic growth in the first quarter, an all-time record, highlighting the shift towards a consumer-driven economy that has been underway in China in recent years.  At the same time, while China’s economy is becoming less dependent on manufactured exports for generating growth, export growth remained solid in the first quarter, due in large part to rising levels of demand in the United States.  Like consumer spending, export growth had been expected to slow, but instead, it exceeded expectations in recent months as the global economic climate remained favorable.  Altogether, these factors contributed to China’s better-than-expected economic performance in the early part of this year.

While Beijing will be pleased with China’s strong economic results in the first quarter, it must be aware that a period of adjustment is forthcoming for the world’s second-largest economy.  This is due to a number of factors, none of which is more important than the increasing threat posed by China’s rising debt levels.  In particular, the Chinese government knows that it will have to do more to reduce lending levels in order to tackle this debt problem, something that will have a significant impact on consumer, business and local government spending when it occurs.  Likewise, other domestic concerns such as overcapacity and an at-risk real estate sector also have the potential to put a major dent in growth in the months ahead.  While the domestic situation is facing a number of major risks, China’s external situation has become much trickier in recent months.  This is due to rising trade tensions with the United States, tensions that threaten to lead to a trade war between the world’s two largest economies that could spread to many more of China’s leading trade and investment partners.  As these domestic and external risks rise, the Chinese government will have to do more to ensure that the Chinese economy avoids a sharp decline in the coming years.