China: From Factory Workers to Domestic Buyers

The global economy is yet to recover from the after effects of the perilously deep recession. Europe remains under the grim clutches of a sovereign debt crisis and the USA is facing a fiscal cliff in 2013. Global demand is slowing and for the workshops of Asia, in order to maintain their extensive growth rates, they must find other means of growth. With a burgeoning middle class, the Chinese government has and must make the transition to a more diverse economy, which would combine domestic consumption with their astounding factory base.

First we must look into why the Chinese economy is so heavily export led. Firstly as a developing country, despite being the second largest economy, is proportionally rural. Rural workers demand very low wage which helps to increase Chinese export and due to their size they experience internal economies of scale. As a country it is split between the developed east and a largely underdeveloped west, with much of the population existing around the poverty line. The issue with having such a large agricultural base in a country as expansive as China is that a very large proportion of the population only earn limited wages. Indeed, only 1/3 of China has a full social-security program, with most of the rural population not having limited access to any form of social security. If a rural population cannot afford basic healthcare, despite being subsidized by the Chinese government, then it may not have the capacity to consume. Furthermore, inflationary living costs appear to be rising above that of GDP and income growth, placing further pressure on those who are at the bottom end of the income pool.

It appears even the growing middle-classes are slow to pass on their buck, proportionally the higher earners save more than their poorer counterparts. Such a leakage from the economy does mean that the potential for increased consumption is further compromised. The Chinese government has begun introducing measures like cutting income tax, or providing tax breaks up to monthly earnings designed to encourage spending. These measures may have had limited success. Global demand is still suffering from the prolonged recession and it is clear that China is yet to fill the void left by the US and EU.

Yet, there is a genuine cause for optimism. The Chinese economy is still developing; it does need to balance its exports with domestic demand but as it pays more generous wages, it can expect demand to grow.  Urban migration is crucial for the Chinese economy to get moving again, but as Albanese states, it will take time. There will be no single quick fix to increase the domestic buyers’ demand, short-term measures like cutting income tax and lower VAT could stimulate demand. But with such a heavy reliance on the manufacturing sector, any fragility here can be dangerous for the Chinese economy. A restructuring is needed, but this has to come from the government as much as it comes from the minds of the consumers.