Dameisha Forum/Forum Opinions/Consumption and the New Stage of China's Development

Consumption and the New Stage of China's Development

Author: Source: Date:2017-09-01
The original title of my speech (in Chinese) is “Towards a More Equal and Sharing Society”, but as my PPT has been made in English, the title has turned into “Consumption and New Stage of China’s Development”. Nonetheless, my core idea remains the same, that is, to move towards a more equal and sharing society.

When we analyze China’s development since the Reform and Opening-up, there are basically two perspectives. One is our market transition, which is to compare China with those countries that have been transitioned from a planned economy to a market economy; the other perspective is modernization, which is to compare China with those developed countries following and forging the East Asian Model, and which have actualized industrialization and urbanization. Distinct from both of these perspectives, these two major transformations have taken place at the same time in China. In consequence, there are some prominent features that we can hardly verify them with these existing rules and theories. That’s how things with “Chinese characteristics” emerge.

Now we say that China has entered a new phase of which we called it the “new normal of the economy” in economics, featuring three main characteristics:

One is the change of our economic growth momentum. While we talk about innovation, it’s in fact hard to observe the degree of which innovation accounts for [economic growth] among major driving forces. What we see clearly is that the effects of investment and export on economic growth are on sharp decline. In particular, the effect of export on economic growth is reduced to almost none, and sometimes even negative. Meanwhile, consumption has seen rapidly growth. In the first three quarters of this year [2016], the contribution of consumption to economic growth has increased to 70%. But this growth is not attributed to an absolute increase in consumption itself, but resulting from the declining investment and export.

The second characteristic as we say is the upgrade of industrial structure, also known as “Made in China.” China’s role as the “World’s Factory” is shifting toward a higher position in the industry chain – a process known as “Created in China” – when Chinese products are protected by intellectual property rights and with higher added value.

The third characteristic is that the reform now progresses from economic reform to comprehensive reform, expanding to cover all areas, especially the social sector.

I think these three changes represent the major features of the  beginning of China’s new chapter.

As we know, the GDP growth now declined to about 6.5%, a process that almost all economists now believe to be the emergence of an “L-shaped” economic growth in China. That is, slight fluctuations upper or lower than 6.5% may be a major trend in the next decade. But as we look at the situation, nearly 40 years before the Reform and Opening up, it was essentially a period of significant fluctuations, despite an economic growth rate of 9% on average was observed. It is clear if there will be relatively small and stable fluctuations in the future. Ten years ago, almost no one in China predicted that our 10% economic growth would have abruptly fell to 6.5%. We thought that at least the era with an 8% economic growth would at least be retained for a long time. So this is a new outcome that we failed to anticipate.

At the same time, we see that the growth of income didn’t witness such significant volatility as that of GDP, nor is there a substantial downward trend at the moment. In most of the time in the last few decades, the growth of urban and rural household incomes has been slower than that of the GDP. But in recent years, there has been a more substantial growth in income than growth in GDP. Now we are saying a parallel growth of both urban-rural household income and GDP during the “13th Five-Year Plan” period, presumably a trend of volatility along the central axis, which is one of our requirements.

Although the contribution of consumption to economic growth has reached 70%, its absolute volume hasn’t grown as fast. This is a growth of the total revenue of social goods. From a long-term perspective, the level of consumption did not just fail to increase substantially; its growth rate is actually on decline, despite the more rapid growth in social goods revenue than the GDP growth.

According to the statistics, our consumption rate, especially the private consumption rate is not just stop growing, but declining instead. From 2000 to 2014, our final consumption rate, that is, the proportion of total social consumption out of GDP, dropped from 63.3% to 50.6% during the course of more than ten years. Since the final consumption rate includes both governmental spending and private consumption, private consumption declined more than the statistics mentioned. Our private consumption rate and the final consumption rate are rather low on a global scale. Especially comparing with other great powers and modernized nations, our consumption rate is far lower than theirs.

Generally speaking, whether a country’s consumption observe fast economic growth depends on income. Despite the great changes in China’s fiscal revenue, both the government and the citizens have gathered wealth. During the 20 years from 1994 to 2014, China’s tax revenue witnessed an annual growth of 16%. If measured in US dollars, the total tax revenue soared from over $78 billion to over $2 trillion, which is a huge number.

During the two decades from 1994 to 2014, the urban and rural household deposits have increased from around $320 billion to over $7 trillion. Now the total household deposits of the entire country roughly equals to 70% of the GDP in that year, which is a considerable amount of money. For a large portion of the urban and rural household deposits, we do not know where it comes from. In theory, the remainder of total household income of urban and rural residents minus their consumption can be turned into investment, either cash in hand or savings. But in fact, merely the increased portion in savings every year is already greater than the remiander. Consequently, for lots of private deposits in the banks, we have no idea where they came from. According to our rough estimations, hidden income in China accounts for around 25% of the total. This is an estimate, and there are higher estimates.

With so much money at disposal, why are people reluctant to spend them, and rather have a high expectation in saving? Even though the banks’ interest rates are now on decline, values of the deposits in banks can hardly be preserved or raised. I think a very important attribute is our income structure and institutional arrangements in the social sector. In other words, the income structure and relevant institutional arrangements are not the only elements affecting the level of consumption. While this argument has not undergone rigorous scientific research, I thinkit is a fairly accurate condition.

Second, I’ll talk about the challenges we are facing now.

One of the challenges is that in China, the income gap has widened rapidly since the Reform and Opening-up, and the Gini coefficient is observing a momentum of growth. We reached the peak of the Gini coefficient in 2008, and in the next five or six years after 2008, our Gini coefficient maintained a marginal decline. This is a curve made out of the data of the National Bureau of Statistics. Its authenticity has been questioned by many, because they feel the gap seems to have continued to expand, how come the inflection point appears now? This is what we often call a turning point of the Kuznets curve.

If the turning point remains very evident after shortened, it shows the Gini coefficient begins an obvious decline. Now it seems the absolute Gini coefficient in China is so much different from that of the United States. A lot of Latin American countries have higher Gini coefficients than China, and many other countries in Asia also feature fairly high Gini coefficients, but in most of the European countries, their Gini coefficients are 0.3, which shows a narrower income gap.

We also collect data from social surveys available. There is a disparity between the data from nationwide social surveys conducted annually by the Chinese Academy of Social Sciences and the data from the National Bureau of Statistics. Calculated with the data from social surveys, the Gini coefficient is generally higher than what’s unveiled by the National Bureau of Statistics, but the trends of which two Gini coefficients represent have been completely consistent with each other. With quintiles division of income, that is, measuring the ratio between the average income of the richest 20% of the population and the average income of the poorest 20% of the population, and you’ll see the income gap is also narrowing. Therefore, we believe this trend should be accurate, though data discrepancy exists due to differences in statistical methodology.

The reason why the statistically narrowing gap does not assemble how people feel in China is that the urban-rural gap gas been one of the biggest factors that affect the income gap. The gap between urban and rural areas can account for about 40% of the entire gap, and in recent years it has been narrowed, so its impact on the whole data is quite significant. At the same time, the gap in individual income is actually still widening, but its impact on the overall data is not as big as that of the gaps between urban and rural areas, as well as regional difference. The main reason for the gap between urban and rural areas in China is the deviations in social and economic structure in many urban and rural areas. That is to say, while agriculture now accounts for less than 10% of the GDP, agricultural labor accounts for more than 30% of the total labor force, or about 45% if calculated according to the number of citizens. For so many rural residents and rural labor force to share the “cake of GDP”, which they can only have access to less than 10% of the cake excluding payments transfers.

In fact, Chinese peasants, when translated into English, should not be translated as “farmers”, as most of them are “peasants” with only half hectare of arable land for each household. It would be improper to render the peasants in China as “farmers”, because “farmers” in Europe have at least an average of 30-40 hectares of arable land. By contrast, the revenue from the land can hardly be equivalent to the income of a middle-income family, which is a plight in our rural areas.

Why does the income structure have such a great influence on consumption? According to our survey data in China, the household consumption rate - the ratio of consumption out of the income in a household - decreases as the household income increases, which means that those higher-income households have lower consumption rate, while lower-income ones have higher household consumption rate instead. So when a social income gap is too wide, a phenomenon would emerge that the rich people’s consumption is saturated, while a large number of people who need to spend have no money. This will result in a bottleneck in the total social consumption. That is why I said that the structure of consumer income, which refers to not just the income level but also the income structure, will affect the outcome of social consumption.

In this consumption structure, we found that there are other factors considerably influencing the overall consumption outcome in China: one is education, one is health care, and another is housing. These three types of expenditure exert huge influences on the level of consumption in China, and their expected risks have now become very unsteady. In other words, with the growth of your household income, you have no idea of how much you would have to pay for your children’s education, for medical treatments and for housing in future. Consequently, this has led to a strong desire for savings among the entire society because a large number of money has to be saved to protect the family from future life risks.

In the past, our calculations show that to support your child’s four years in university in China, saving 100,000 RMB in the bank for him would be enough. However, now that you only have one child, if he/she were not admitted to a prestigious university, you would want to send him/her to study in the United States. To support him studying for four years in the United States, you’ll have to save at least 1.5 million RMB, without even knowing whether he will get a job after graduation. Therefore, such expected risks are now unlike what they were 10 or 20 years ago, which has a critical impact on our consumption behaviors as a whole.

Be it the middle-income group or the middle class, many Chinese newspapers say they have become a huge consumer market in China. But in fact, according to our measurement by these three standards- we defined the middle class with an income above the medium in the social income structure, a white-collar occupation, and with a tertiary education level - about 25% of the population belongs to the middle class. This percentage is about the same as the percentage of the middle-income group that the National Bureau of Statistics calculated with the annual income. According to the most recent calculation made by the National Bureau of Statistics, the percentage of the middle-income group in the 2015 population was 24.9%. Although the standards of measurement have not been the same, the outcomes were very close. That is to say, China has still a very small portion of the middle-income group or middle class, despite the huge absolute number.

There is also another issue affecting our consumption. Why am I talking about consumption? The emerging era and trend of mass consumption are inseparable from the leading role of the middle class, as exhibited in the international market. Consumption is not just an issue related to income, but also the income structure as well as the concept of consumption. As Mr. Li Yining said just now, consumption can happen due to satisfaction of needs or acquisition of taste. As you go with the fashion, you are leading  a trend consumption among a certain group.

But in terms of another concept of consumption, you will see that it is subjected to the subjective identification of social class. In China, a relatively low degree of subjective identification has taken place. In contrast, a majority of the population in many other countries believe that they belong to the middle class, regardless of the objective degree of income gap. Whether in countries with a relatively wideincome gap such as Brazil and the United States, or otherwise such as France and Japan, people who believe they are part of the middle class roughly account for about 60% of the national population. But in China, you’ll see only about 40% of its population considers themselves to be the middle-class. This percentage is far lower than that of many other countries, and it is even over 10% lower than that of India. This is a very strange phenomenon. During our exchanges with our Indian counterparts, we compared our survey respondents and discovered that many Indian respondents who live in slums believe they belong to the middle class, whereas a considerable number of civil servants among the Chinese respondents deem that they belong to the lower middle class. No doubt this difference in identification has a strong influence on consumption. What gives rise to such a difference? A lot of complex factors such as religious and cultural factors, as well as the development and trends of income gap contribute to this difference. This subjective identification has a great impact on not just our consumption, but also the sense of equality in the society.

Then there is the demographic factor. The pace of population aging in China, like the new normal of our economy, is a new prospect that we, including demographers, failed to anticipate more than a decade ago. More than twenty years ago, back in 1990 when the Fourth National Population Census was conducted, our population structure remained a relatively standard pyramid shape: the top being 100 years old, the bottom being 0 years old, and the younger the age the more population in the age group. The year 2010 marks the most typical period of demographic dividend, with a low proportion of the elderly and children and the working-age population made up the most of the population. Just in time to catch our golden decade, sizable low-cost labor supply contributed to our economic glory. When we complete building a moderately prosperous society in all respects in 2020, the pyramid will start to reverse. By 2040 and 2050, we anticipate that as China actualizes its modernization, our population structure will essentially be upside down compared with that of 1990 mentioned earlier.

Such a large process will have a tremendous impact on consumption. As we all know, in the intergenerational studies, the consumer behaviors among different generations vary considerably, especially the consumption made by the senior citizens would turn gradually conservative sometimes. I do hope that entrepreneurs would pay attention to this huge market of senior citizens. You see, a large number of Chinese people travel to Japan to buy toilet lid, indicating that we fail to pay enough attention to this consumer market. Not that we cannot manufacture them, but that we didn’t give enough attention. This is also a very important element for our consumption-driven economy in the future.

The dependency ratio of our society-the combined ratio of the children and senior population in the total population –fell below the lowest level in history in 2015. During the Reform era, one of the best demographic trends in China is that the dependency ratio of the entire society has been falling all the way, indicating there are more working-age population and fewer dependents. But from now on, China begins to enter a new era where the percentage of working-age population will diminish while the number of dependents will be on the rise. Therefore, this is a daunting challenge for China to achieve economic growth.

Taking the opportunity of my speech today, I would like to share the policy implications. First, we should guarantee the growth of household income during the period of the “13th Five-Year Plan”, overriding the situation in the past three decade of which the growth of household income is slower than the GDP growth, and instead keep up with it. Of course, it is controversial as some are afraid that the substantial growth of income – hence wage – would result in rapid increase in labor costs, which in turn imposes pressures on cooperates. Second, we’ll need institutional arrangements in the social sector, especially social security, to clear the way for the arrival of the mass consumption era. Third, the gap between the rich and the poor should be further narrowed, focusing particularly eliminating poverty. Now we are committed to reducing more than 50 million of population below the current poverty line (annual income of 2,300 RMB per the price in 2010) by 2020.

Finally, we hope to forge a large middle class that mainly comes from the advancement in blue-collars among the migrant workers, as well as the supplementation of  college graduates. Do not leave the college graduates to the ranks below the middle class, only with that can the future society achieve a relatively stable growth.
Thank you!

Peilin LI is the vice president of the Chinese Academy of Social Sciences (CASS)

Speech delivered at the opening plenary of the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.