2.5 Consumption to continue growing strongly
Despite slowing aggregate growth, consumption is expected to continue to grow strongly in coming years in China. There is likely to be a turning point in the growth in the working-age population (as detailed in section 2.3 above); as the working-age population declines and the age dependency ratio begins to rise, people will start drawing down their savings and spend more of their income on consumption. In addition, private consumption makes up only 35% of GDP, compared with a typical advanced economy of more than 60%, indicating that there is plenty of room for consumption to grow. Increasing urbanisation will also lead to higher consumption, with the UN estimating that by 2020 the urban population will increase by 15 million per year.
As the government introduces more social security, reducing the need for precautionary savings, the saving rate will most likely drop and consumption will rise. The Chinese Government's Twelfth Five Year Plan (2011-2015) incorporated a move in government spending from infrastructure to social services, although whether this is implemented in the near term remains to be seen. The transition to new government leadership which began in late 2012 may hold up any change in policy direction. However, the government has begun making some attempts to rebalance the economy more towards consumption.
Part of the large fiscal stimulus package introduced to support China through the GFC involved consumption-boosting measures including RMB850 billion (NZ$170 billion) on medical and educational spending, income transfers to the rural sector, public sector worker and pension increases, as well as consumption and healthcare subsidies. There have also been policy reforms with the introduction of Labour Contract Law, increasing personal income tax thresholds so the number of households paying income tax will fall by 60 million to 24 million, the introduction of a rural pension scheme to cover 60% of counties and expansion of the urban pension scheme to have national coverage in 2012.
These factors will be positive for future Chinese private consumption. In order to achieve the goal of authorities to facilitate increasing consumption, analysts consider that policies to raise incomes should continue to be expanded and the social safety net extended to reduce the need for precautionary savings. An appreciation of the currency would also encourage consumption at the expense of exports. If the financial system is deregulated and real deposit interest rates rise, Chinese households are likely to reduce their saving rate as they appear to target a stock of savings and higher real interest rates would help them achieve that target level (IMF, 2011a).[37] In the following section we explore some of the specific channels through which China's future growth is likely to influence the New Zealand economy.
Notes
- [37]See also Nabar (2011).
