The Greatest Consumption Story in Modern History

By staff reporter ZHANG XUEYING

STEPHEN S. Roach, chairman of Morgan Stanley Asia, has quipped that China’s 12th Five-year Plan is likely to spark the greatest consumption story in modern history. He pointed out that the 12th Five-year Plan focuses on three major pro-consumption initiatives, which will boost private consumption as a share of Chinese GDP from its current reading of around 36 percent to somewhere in the 42 to 45 percent range by 2015. It would also be a huge boost for China’s major trading partners – not just those in East Asia, but also in the growth-constrained European and U.S. economies.

The backdrop for this is how China weathered the 2008 global financial crisis. The meltdown did produce a dip in China’s economy. In fact, the Purchasing Managers’ Index (PMI) of China’s manufacturing sector dropped to a record low of 38.8 percent in November of 2008. PMI can reflect the entire economy of a country. A reading below 50 percent rings an alarm bell for economic slowdown.

Shoppers stream in and out of a Walmart store in Shanghai on New Year’s Day, 2011.                                                                                                        CFP

Inside Job

The Chinese government reacted immediately to warning signs by adopting a stimulus package estimated at RMB 4 trillion and a series of loose monetary policies. The main contents of the package plan were: first, to boost domestic demand; second, to implement an industrial rejuvenation program; third, to encourage progress and innovation in science and technology; and fourth, to raise the level of social security. These measures did not disappoint. “China’s economy resumed stable and brisk growth last year. A key indicator was its rational growth rate for the later half of the year,” stated Zheng Xinli during this year’s session of Chinese People’s Political Consultative Conference (CPPCC) in March. Zheng is a CPPCC delegate and vice chairman of the China Center for International Economic Exchanges (CCIEE). He also made the optimistic prediction that “China’s economy will maintain last year’s growth dynamics in 2011.”

In 2010, while the world’s economy grew by only 4.5 percent, China’s GDP expanded by 10.3 percent. The gain is 11.9 percent in the first quarter and 10.3 percent in the second. In the second half of 2010, the Chinese government shifted its monetary policy stance from relatively loose to a more prudent firmness by raising the bank reserve requirement ratio and hiking interest rates. The country’s GDP growth rate slowed down in response but still achieved 9.6 percent and 9.8 percent in the third and fourth quarter respectively.

Other figures also show the robust recovery of China’s economy: actual utilization of foreign investment increased by 17.4 percent; the number of newly approved foreign-funded enterprises in China totaled 27,406 in 2010, up by 16.9 percent over the previous year. “Private investment is going up even faster than government investment, which means an endogenous economic growth has been formed thanks to the government stimulus policies,” explained Zheng Xinli.

Consumption, Export and Investment Model

China’s vice premier Li Keqiang pointed out in an article written in 2010: “In the past the government investment mainly focused on industrial development and infrastructure construction, but now China’s economy has entered a new phase; therefore more government investment should go to employment, social security, education, healthcare, science and technology research and infrastructure building in rural areas.”