China is Rising… But What About its People?

The People’s Republic of China cannot continue to enjoy the same economic prosperity it has enjoyed in the past through its manufacturing-export-driven economy in the next decade. Instead, it must focus its attention on improving domestic consumption of goods and services.

Export-driven economic growth has had an important place in Chinese history. During the imperial era, the Silk Road brought silk and other “exotic” goods from China to the western world. The Silk Trade brought such prosperity to the Chinese empire such that the palace mandated execution for any individual that revealed the process for silk-making.

Since then, China has gone through economic and political turmoil, culminating in the rule of Mao Zedong in the second half of the twentieth century. Deng Xiaoping’s subsequent ascension to the role of “paramount leader” saw economic liberalisation, bringing great wealth and prosperity to the regions that participated in a new manufacturing-export-driven economy.

China experienced a steadily high GDP growth rate over the past 30 years due to foreign investment, lifting many peasants out of poverty and bringing luxuries unimaginable to the previously poor populations in the country.

Through careful economic planning, China has become one of the dominant exporters of consumer goods in the world. Its GDP per capita has risen from a mere $439 in 1950 to over $3000 today.

However, in the recent decade, China’s socioeconomic condition, as well as the global economic downturn in 2008, has necessitated action on part of China’s leaders to change the direction of the nation’s economic planning away from its current method of growth.

China’s success in building consistently high-performing manufacturing-export-driven economy is because of its comparative advantage in the provision of labor.

Due to its large population, China can provide cheaper manufacturing for products ranging from iPods to t-shirts.

However, with the implementation of its One-Child Policy for population control, China’s capability to produce at a cheaper rate has slowly declined. The population growth rate decreased from 1.5% in 1980 to 0.6% at present.

Although annual net population growth is considerable, China faces a rapidly aging population because of the One-Child Policy, and thus there will be a decline in the labour force available for manufacturing-intensive jobs over the coming years.

Furthermore, the standard of living in China has risen dramatically over the past decade, in-line with the growth in per-capita GDP. Labour is no longer as cheap as it was before, and workers in China now make three times as much as workers in Pakistan and Vietnam. There is a shortage of workers in some regions, and some producers have found themselves hiring recruiters to go into the countryside, offering improved benefits and higher salaries to entice workers to join their factory.

In addition, there is a wealth gap between the coastal regions of China, which have seen rapid urban growth and development of infrastructure such as high-speed railways, and the inland, rural areas of China, many of which are still without electricity. The GDP per capita difference between the richest province and the poorest is ten-fold. There is a lack of affordable health care and social security in China, and combined with poor infrastructure in rural areas, social instability is clawing at the central government.

Faced with these issues, it is imperative that China’s government focus its efforts on developing itself internally and encouraging domestic consumption. With a three trillion US dollar currency reserve[v], the government is well-positioned to spend vast sums of money on civil infrastructure, such as electricity and communications delivery. If modern technologies available in cities were brought to the rural areas of China, there would be a change towards a more domestically-driven economy.

China should also increase individual household consumption.  Currently, China’s household savings rate is over 30%, dramatically higher than those of many other nations[vi]. This is due to the lack of social security and the need for Chinese men to own a house in order to marry.

Although Chinese people do consume tremendous amounts of luxury goods, they fear economic uncertainty, and especially with the lack of a government safety net, Chinese households tend to save more money for emergencies, and to provide for elderly family members.

At the same time, there is a low savings interest rate paid by banks, since they are state-run, which cannot keep pace with inflation. These factors combined make the life of the average Chinese citizen less pleasurable than beforee.

The changes facing China’s economy are of potentially great benefit to the standard of living for the Chinese people – better-developed domestic infrastructure would improve the quality of life for millions of peasants living without modern amenities in the countryside, while government incentives for consumption of non-essential goods could provide an opportunity for many Chinese families to acquire new products and live a wealthier lifestyle.