Feb 27 2008
China: formerly the world’s factory, now a nation of consumers…
Published by Jason Welker at 11:00 pm under
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Wikipedia Economics focus | From Mao to the mall | Economist.com
China, long acknowledged as the world’s factory, could suffer if falling demand for its exports in the US results in a decline in aggregate demand and GDP here as some economists believe it will. But not all economists agree on the importance of exports to China’s domestic economy:
The increase in net exports (exports minus imports) has never been the main source of China’s growth. It contributed two to three percentage points to annual GDP growth between 2005 and 2007, whereas domestic demand (consumption and investment) added eight to nine percentage points.
But the latest figures show that exports have become even less important as a driver of growth. The World Bank’s latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year to the fourth quarter of 2007 (see left-hand chart). Overall GDP growth slowed only modestly (to 11.2%) because of faster growth in domestic demand, which contributed an impressive 10.8 percentage points.
In other words, the China of today depends on exports for its economic well-being far less than the China of yesterday; rather, today’s China is a nation of spenders. Many forces are at play here, but two that have a significant impact are slowdown in consumption and aggregate demand in the US and the weak dollar, which combined to reduce China’s trade surplus (meaning exports from China are declining while imports from the rest of the world increase):
So if exports are making up less of China’s GDP now than in years past, then what accounts for the biggest slice of China’s GDP pie? Investment, long China’s largest component of GDP, may have slipped to second place for the first time last year, as Chinese households have opened their wallets to spur growth in 2007 to 11.4%:
Mark Williams, an economist at Capital Economics, a London-based research firm, calculates that in 2007 consumption accounted for a bigger slice of GDP growth than investment for the first time in seven years. Government restraints on bank lending caused investment growth to slow slightly, whereas consumer spending picked up.
These figures are good news for more than just Chinese consumers, who clearly are enjoying access to more goods and services than ever before, a sign that economic growth has led to real improvements in quality of life for those Chinese lucky enough to participate in the thriving market economies of the rich eastern provinces. Also happy about the rise of Chinese consumption, however, is the American government and the domestic firms whose interests they often represent.
A consumption-focused Chinese middle class will increase demand not just for China’s output, but for foreign output as well, hopefully leading to a more balanced trade between China and its trading partners including the US. Higher levels of domestic consumption in China will lead to rising price levels and corresponding increases in wages, reducing the international competition for manufacturing jobs that has led to the “off-shoring” of so many American factory jobs.
Of course, the wage competitiveness in China will assure its dominance in manufacturing for the foreseeable future, but for those American firms still manufacturing products in the US, rising wages and price levels in China may improve the chance that some jobs threatened by globalization will remain in the US for a while longer. The weak dollar also bodes well for US manufacturers, who will enjoy increased exports to China, which may in fact help fend off a US recession in 2008.
As I’ve mentioned in both my IB and AP Economics classes repeatedly in the last year, a slowdown in exports from China might be just what is needed to fix the most dire macroeconomic problem faced by China today: inflation (estimated at over 7% in January of this year!) And even if a US recession and a weak dollar strike a substantial blow to China’s net exports, it appears that this nation of spenders will be able to keep its economy afloat just fine in the future, without having to depend on consumers from the rest of the world.
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
I think this very good for China’s economy. As we learned in class, a majority of China’s GDP comes from foreign exports. However, as domestic spending increases, this will increase GDP even more and may save the GDP if exports DO decrease someday. Graphically, China’s aggregate demand curve would shift outward, thus increasing GDP and the price level.
All the previous investment in businesses in China has resulted in a richer China. China will soon become a developed country like the West and their GDP will become dependent on their CONSUMER SPENDING rather than their net exports.But this exponential growth in demand may cause demand-pull inflation. Which isn’t usually a good thing…
I think China becoming a nation of consumers on top of its booming factory industries means that economic growth in China will not slow down too soon, even as international exports decline. China’s growing consumer market, with its gigantic population, may have the ability to allow domestic consumption to outweigh losses in the export sector as a result of higher wages and much stronger currency.
Although China is suffering some losses in the export sector, reducing its AD, its growing consumption I believe will outweigh those losses, thus causing the entire AD curve to shift out. As RMB is appreciating, I believe that this increases imports of foreign resources, and with the added supplies of resources,as the prices of imported resources AS shifts out as a result. This is a great combination: there is real GDP growth, full employment, and relative price-level stability.
Although China proabably hasn’t reached that yet, I think China has a pretty bright economic future.
As jack said, China will gradually be dependent on the vast consumer spending instead of it’s net exports. Although net exports will still be a great factor of GDP in China, but consumer spending will be rising rapidly since China itself is becoming more and more developed. And this incredibly vast amount of consumers in China, i believe will shift the aggregate demand to the right. However, just as Jack said, it might cause a demand pull inflation, due to the lack or inability to supply the high consuming ability.
What’s interesting is that China’s previous position as “the world’s factory” is actually what pushed it to its place today as a vibrant market of consumers for the world’s product. While being “everyone’s source for cheap labor” may have seemed an undesirable place to be, the remarkable thing about economics that plays out in China’s story is that the economic growth this nation got from utilizing cheap labor was able to bring progress that has now changed the nation to the side of MDCs with a heavier emphasis on consumption as part of their GDP than investment. Maybe this would be a good example for other LDCs to look at as a sign of hope that their current position as just sources of cheap labor will eventually bring their countries up to a higher economic level and actually transform the very factors that are contributing most to their GDP, vastly improving their citizens’ standards of living on the way.
In the increase of consumer spending, the blog says that there will be increased demand for not only Chinese products, but foreign products as well. In my opinion, Chinese products that are sold domestically are not has high quality as the ones that are exported to other countries. The introduction of more foreign goods creates competition; this might possibly make Chinese firms produce better quality products that are close in quality to foreign goods. Also, a more balanced trade between the US and China would be good for expats, since currently, some American products are difficult to find here.
As Charlie said, the fact that domestic spending is on the rise will help offset if and when the exports decline further. Domestic spending may be on the rise but China is still the world’s factory. Pretty much everything I bought from the US is made in China and if people go to other countries, they will see the same thing.
On another note, since the US dollar is cheaper everyday, the exports from the US will increase. This will further China’s domestic spending as more and more US products are cheaper.
Maybe China’s spending is more important because they have such a huge population, and now that these people are starting to spend money and make their own investments a previously nonexistent part of their GDP can grow.
And as jolo and those before him said, this is only helped by the nature that the RMB is gaining on the dollar.
In response to Rebecca’s post I don’t think there will be much competition between foreign manufacturers and domestic ones. Many Chinese people live near the international poverty line and can’t afford to buy more expensive, better brands, and thus they will stick to the Chinese-made products. In addition to this, there is also brand loyalty to these Chinese products. Chinese people want to support and buy Chinese products.
I read a news article on msnbc.com recently that relates to this issue: http://www.msnbc.msn.com/id/23278830/
It talks about “Chinese factories losing competitive edge.” According to the article, rising prices in energy, materials, and labor are also causing a rise in the products, meaning the thousands of Made-in-China consumers will be paying more than before. More consumers in China might also mean higher standard of living; China is progressive, and as labor and environmental regulations are tightened, the cost of producing will go up. More small factories in China are expected to shut down and relocated to cheaper places such as Vietnam, Indonesia, and Bangladesh. Seems like China will soon lose its place in the eyes of investors.
I agree with what Annie said about how China is about the “lose its place in the eyes of investors”. I have heard many times that it is not cheap to live in China anymore, that the prices of everything are rising. The standard of living in China has definitely gotten a lot better since I arrived in China a while back. When wage rate rises and corporations don’t receive as much profit, they tend to find and relocate to somewhere cheaper. That might hurt China because many people will lose their jobs and their skills would be kind of useless.
Even though labor costs are rising in China, other aspects of the economy like real estate are booming. So even if some companies are looking for cheaper countries to produce their products, I don’t think the overall real GDP will be affected that much. Other things like real estate and the rising value of the RMB will make up for it. In addition, since more people in China are becoming wealthier, China’s own domestic consumption will continue to increase its real GDP, as mentioned in the article.
Just like what the article has mentioned, China’s domestic goods is a big component to China’s rising GDP, and the consumption on the domestic goods will keep increasing China’s real GDP.
China is slowly developing right now, the wages and rent of factory has definitely gone up. Some business are not willing to raise wages for labors because then they won’t get as much profit. Just like Kevin said, those business might start relocaing their factories and stuff to somewhere that they can get cheap labors.
with increase in consumption of chinese goods, this may help boost china’s economy because this is one of the big factors that could affect the GDP. i have to agree and disagree with what serenatu says, china is actually developing very quickly, and yes, cheap labour is an advantage in china, and is helping firms who employ these cheap labourers to increase profit, by a lot more than, say, US with expensive labours.
Before, China’s GDP growth used to depend on the foreign export, but now as China’s domestic consumer spending increases, China is experience even a greater GPD increase. As we learned in class this will make China’s aggreate demand curve to shift to the right.
This trend of increasing domestic spending is evident in all growing economies. China cannot depend its economy on cheap labor and foreign demand forever because these are often characteristics of countries that are less developed. China’s growing independence from relying on its exports to boost GDP is another sign that this country is acquiring a stronger market power globally. If this is the case, China would have acquired a stronger trading position due to its rising domestic demand
Personally, I don’t mind that China is growing so fast. It’s interesting to be able to live in a society that is growing so fast economically AND socially. Throughout my past 15 years in Shanghai, I’ve come to realize that not only has Shanghai changed physically (and in air quality) but it’s people have changed along with it. I really hope that this growth will continue. Hopefully the inflation will subside…somehow and everyone will live happily ever after. or at least the Chinese will.