Since China’s economic take-off in 2000, investment has driven GDP whilst the contribution of consumers’ spending diminished. This is common in export-oriented economies, but China’s low private consumption has continued for over a decade, setting it apart.
There are many factors behind this: the uncertainty created by the transition from full-blown communism caused households to save, not spend; To generate rapid growth on its own terms, the Chinese authorities prioritized exports, including urban infrastructure improvements to support hyper-efficient manufacturing; the post-GFC stimulus was, in retrospect much too strong, leading to a wave of over investment.
China is shifting gears for future growth and will become a consumer-led economy in little more than seven years (Figure 1). Inflation-adjusted retail sales increased by 10.5% in 2017, up 50 bps from the previous year. Consumer confidence is near the all-time high. New light-vehicle sales were up 11% in the year to April. We hear a lot about China’s “debt mountain,” less about the growing power of the consumer economy. A number of forces are at work creating this change: