China aims to boost domestic consumption

Chemical companies, Consumer demand, Currencies, Economic growth, Financial Events

Xi Jinping.jpgThe dramatic rise of Asia’s economies, including China, has been based on an export-driven model. Their growth powered ahead as long as the West grew, and companies continued to outsource much of their basic manufacturing activity to lower-cost countries.

In 2001, for example, China’s exports were just 20% of GDP. But by 2007, they had reached 37%.

Similarly, Asia’s exports were just 25% of total GDP (ex-China, Taiwan, Japan) in 1980, but were 50% by 2008.

Today, this model looks more and more unsustainable. Thus the blog welcomes comments by China’s Vice President, Xi Jinping, calling for a new direction. Speaking at the weekend, he argued that “we must develop the economy mainly by relying on the domestic market and attach great importance to domestic demand, especially consumption demand, in driving economic development.”

This comment suggests that the argument by China’s Liu He, a finance Vice Minister, back in August 2008, is now becoming mainstream. He suggested then that ‘the era of low costs and high growth has come to an end for China, and an economic restructuring is inevitable’.

The transition, though healthy for the long-term, is unlikely to be smooth. Export-oriented factories cannot suddenly be rebuilt to serve domestic needs. Equally, whilst a stronger currency will help keep domestic inflation under control, it will also reduce export competitiveness and volumes. March’s first trade deficit for 6 years may not be its last.

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