China's New Economic Paradigm

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For years, the Trends editors have forecast that the developing world, led by China, would have to develop a consumer economy that would progressively take the place of North America and Europe as the engine of prosperity.  Now, the deleveraging of the American consumer has finally triggered this transformation. 

China ensured its recent years of explosive growth with a paradigm that relied heavily on investments by its government and multinational corporations.  These investments were aimed at the production of goods for export to large and affluent Western consumer markets.  The program worked, lifting hundreds of millions of people out of poverty and raising the standard of living in China, even while swelling government coffers to unprecedented levels. 

But China's dependence upon a foreign consumer base represented a vulnerability, as well as a strength.  When the global recession hit, Westerners stopped buying, Chinese exports shrank, factories began closing, and tens of millions of people were pushed out of jobs.  In response, China unleashed a $600 billion stimulus package that triggered lavish lending from its banks.  The aim was to rapidly return its economy to growth.  But, as explained in China's New Place in the World Economy1 in the September 2009 issue of Trends, this was only a stop-gap measure; it can't be sustained for the long term. 

China's leadership realized that its long-term prosperity and stability depends on transforming China's people into Western-style consumers.  This will require an enormous feat of social transformation.  At present, China's domestic consumption accounts for about 36 percent of its gross domestic product.  Before the Great Recession, the comparable figure for the United States was 70 percent of U.S. GDP. 

Without a change in behavior, Chinese consumer spending will grow very slowly, at a rate of about 3 percentage points annually.  According to experts at McKinsey and Company, it will eventually level off at about 39 percent of GDP.2  This means that China would remain dependent on foreign consumers and its ability to export goods to them, while the Chinese government continued to be the prime investor in new growth.

According to the McKinsey Global Institute, China has recently announced pro-consumer policies that should raise consumption to about 45 percent of GDP.  But that would still fall well short of the consumption levels found in the big Western economies...

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