The Limits of China’s Consumer Revolution

After the global economic crisis weakened the external demand that fueled China’s economic growth over the last three decades, the country’s leaders agreed that domestic consumption must become the new engine of economic growth. But China cannot achieve stable, sustainable growth unless it also upgrades its manufacturing sector.

SHANGHAI – China’s economy is at a crossroads. As 2013 begins, foreign and domestic observers alike are asking which path the country’s economic development should take in the next decade. How can China ensure stable and sustainable growth in the face of significant internal and external challenges, including slowing medium- and long-term growth, rising labor costs, and growing inflationary pressure?

After the global economic crisis weakened external demand, which sustained China’s unprecedented economic growth for three decades, the authorities agreed that internal demand, especially domestic consumption, must become the country’s new growth engine. At the Chinese Communist Party’s congress in November, China’s leaders declared their intention to double per capita income by 2020, unleashing 64 trillion renminbi ($10.2 trillion) of purchasing power.

Indeed, with roughly 130 million middle-class consumers, China’s domestic market holds significant potential. The Boston Consulting Group estimates that, with an average annual GDP growth rate of 7% in China and 2% in the United States, Chinese domestic consumption will rise to half of America’s by 2015, and 80% in 2020 (assuming that the renminbi appreciates at an average rate of 3% against the US dollar over the next few years).

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