China's Domestic Consumption - Glass Half Full or Half Empty

The following table by McKinsey was highly illuminating. It puts into sparkling perspective how important private domestic consumption is to each country as a percentage of GDP. One should always strive to be more led by domestic consumption as that usually means a better grasp and control of an economy's fortunes. China has been desperately trying to lead the world back from the diminished global trade due to the recent global financial crisis by shifting from an investment led economy to a more domestic driven type. As the table shows, its a long uphill climb still. Thats the negative way of looking at things - the half full view would be that there is still a lot China can do (and will do) to ramp up its domestic economy, and it will only means more consumption of global goods and services in the long run. Its going to be the Asian century mainly by moving just 10%-20% of the rural folks in China and India into the middle class consumption category.

On a side note, Malaysia's domestic consumption as a percentage of GDP is high enough but the major caveat about looking at tables such as these is that if your population is smallish, the high private domestic consumption percentage figure is too one dimensional. If your population is say less that 50m, you probably HAVE to be led by investment as a priority as your population will not be able to generate sufficient critical mass of demand for your industries to compete on a global scale with the economies of scale that is needed.

p/s photos: Jessica Gomes

Can China's Demand Strength Stir Global Demand?

# Signs that extensive government investment and credit extension are contributing to a soft landing for China are giving rise to hopes that Chinese demand might support other emerging economies. Chinese commodity imports, which have surged in volume terms, may be supporting commodity exporters in Latin America and Asia in particular, yet other imports continue to be weak.

What Countries Might Benefit From Chinese Demand?

# Singapore, Taiwan and South Korea have been more dependent on exports to China, while several South East Asian economies like Indonesia, Malaysia, the Philippines and Thailand have lower dependency.
# The composition of Chinese imports has also shifted. Fewer intermediate goods are being sourced for the processing trade given weak demand in the G3, the ultimate recipient of such goods. This shift, if persistent, could hurt traditional exporters in East Asia like South Korea, Taiwan, Singapore and Japan which have tended to be reliant on Chinese demand.
# China’s imports of commodities such as iron ore, coal and crude oil have been extraordinarily strong, increasing speculation that China is building strategic inventories of the most important commodities - boosting Latin America (especially Brazil and Chile) the ASEAN countries and Australia.
# With Latin American trade with China having increased, a Chinese slowdown would have a more significant role than one in the U.S. or the EU.
# While strong US retail sales previously pushed up exports from China, in turn boosting China’s imports, the engine for China’s economic recovery is now likely to be public works spending. Thus, China's imports from Japan may be lower than expected.

Will Chinese Recovery Lead to Import Growth?

# China seems to be sourcing an increased share of parts and intermediate goods domestically. Despite an increase in car sales, auto parts imports and autos have not increased. China has been implementing a Buy China policy for its stimulus projects which might continue to hold down China's goods and services imports.
# Over time, as China's growth shifts to more domestic sources, its demand will boost the rest of Asia. In the short-term, however, a sustainable recovery in developing Asia depends on positive developments in advanced economies. While Chinese government investment has boosted its outlook in the short-term, such efforts may provide little support in 2010 if global demand continues to be weak. A reduction in Chinese exports and export related capex could lead to weaker potential GDP over the next three to five years.
# Overall, Chinese imports continue to seem weaker than would be anticipated during an investment boom. Land purchases may account for a significant share of the reported Fixed asset increase.
# There is a risk that Chinese investment might be contributing to further overcapacities and domestic imbalances. If China (and other export economies) continue to export capacity rather than boost consumption in the face of global demand, it could weaken the prospects of global economic recovery.
# The rebound in China’s exports since early in 2009 has been weaker than in most other Asian countries, suggesting that China has been a major driver in Asian countries’ export recovery.
# China can lead but that will not be enough to save the world or the other Asian economies.
# China generates only 7% of global output, at market prices; moreover, real imports are likely to fall 5% in 2009 . China's net stimulus to the rest of the world will only be around 0.1% of global output.
# A slowdown to 6% or less in China’s growth rate would have significant impact on the already weak global economy.
# Even if it escapes a hard landing and achieves 7-8% growth, subpar GDP growth in China over the next two years at least will weigh on global growth.
# Income increases in East Asian countries and currency appreciation would cause large increases in consumption imports (those that are consumed at home). In 2006, in addition, U.S. consumption goods imports in 2006 equaled $430 billion while East Asian consumption goods imports equaled $220 billion.


p/s photos: Zhang Xin Yu