Atlantic Council

The Atlantic Council's Asia Program and the U.S. Chamber of Commerce jointly hosted a roundtable discussion on the Chinese economy's transformation to a consumption-driven model.  The conversation analyzed the McKinsey Global Institute’s new study, If you've got it, spend it: Unleashing the Chinese consumer.

Participants:

• Dr. Jonathan Woetzel, Director and Cofounder of the Greater China Office, McKinsey & Company
• Richard Dobbs, Director, McKinsey Global Institute
• Dr. Nicholas Lardy, Senior Fellow, Peterson Institute for International Economics

Event Summary (by Yoonhee Rho, Asia Program Intern):

In line with the increase in the population and economy of China, the rise of the middle class and how they spend their money has become an important issue. China’s private consumption amounted to $890 billion in 2007, making it the fifth largest consumer market in the world. Compared to China’s population and level of economic development, however, China’s consumption to GDP ratio is only 36 percent. While there is no optimal level for the share of consumption in an economy, it is argued that the case of China is unbalanced and at too low level. Based upon these observations, McKinsey Global Institute (MGI) released a report on the topic of what drives the long term interests of future businesses in China, entitled If You've Got It, Spend It: Unleashing the Chinese Consumer.

MGI undertook the research to build an understanding of the drivers behind China’s low consumption share and to identify potential policy initiatives that could contribute to a rebalancing of China’s growth model over the next 15 years.

Consumption- and service-led economies tend to create more jobs per unit of investment, accompanied by higher wages per dollar invested. In addition, a combination of higher consumer spending and greater government consumption could spur additional job creation and GDP growth. However, MGI indicates a comprehensive reform with structural change is required to deal with this issue.

MGI has set three broad groups of policies to increase a consumption to share of GDP in China. The two scenarios – the policy case and a stretch case – compare the impact of policies based on the current macroeconomic forecasts.

The first policy group is a direct stimulating approach. It deals with relatively short-term initiatives focused on creating a more comprehensive “consumption infrastructure” that would make it easier for Chinese citizens to purchase a wider range of products and services than are available today.

To implement this policy, improving the quality of products, increasing the availability and uptake of consumer credit, and encouraging consumers to increase their use of credit as a means of responsibly financing home purchases, education, and a broader set of consumption needs are required to allow consumers to borrow against future income to make big-ticket purchases that would increase their quality of life.

The second policy group is an improved social safety net that would boost health care and retirement spending, and not merely boost consumption. Greater public provision will help guard against the potential for social instability that may result from the inequities caused by the rapid economic growth and urbanization that China is experiencing today.

The third policy group is undertaking structural reforms to increase household income. Chinese leaders recognize that shifting investment to more efficient and labor – rather than capital - intensive service sectors would have a multiplier effect on employment, economic growth, and consumption.

Moreover, MGI considers that improving investment-related sources of household income is important. By giving high-saving households access to a greater array of financial products and services such as mutual funds, fixed-income products, and annuities improving returns on household assets over the long-term, consumption would increase more feasibly.

To make China shift toward services and boosted incomes, MGI suggests three policies. The first is encouraging financial-sector liberalization. The second is aggressively pursuing greater investment efficiency and consolidation in industry. The third is supporting the development of small and medium-sized enterprises (SMEs). Today, these companies face several barriers to market entry and growth. A reform of business licensing procedures, more supportive labor market policies, and easier credit access are necessary if service-sector SMEs are to increase their share of China’s economic activity.

MGI forecasts that these policies will lead China to open up new sectors and make a more contestable market which would bring 40 percent annual growth in consumption.

Dr. Jonathan Woetzel Bio:

Dr. Woetzel is a Director in and cofounder of McKinsey & Company’s Greater China office. In his 25 years with McKinsey & Co. he has led its Corporate Finance Practice in China and its Asian Energy and Materials Practice.  He has led numerous research efforts, including several McKinsey Global Institute studies on China and Asia, and is also an expert on China’s energy and climate change policies.  Dr. Woetzel has advised a broad range of Chinese and multinational companies on strategic, organizational, and operational issues. His work has encompassed automotive, food, healthcare, energy, pharmaceuticals and medical products, chemicals, steel, and natural resources sectors.

Richard Dobbs Bio:

Richard Dobbs is a Director of the McKinsey Global Institute (MGI), McKinsey & Company’s economics research arm, and a Director (Senior Partner) of McKinsey, based in Seoul. He previously co-led McKinsey's Corporate Finance practice, where he was also responsible for research. Dobbs has written numerous articles about the implications of the financial crisis for companies and managing in a downturn. Other research has focused on performance management and measurement mergers and acquisitions, valuation, capital markets strategy, and utility regulation.

Dr. Nicholas Lardy Bio:

Dr. Nicholas R. Lardy is a senior fellow at the Peterson Institute for International Economics. He joined the Institute in March 2003 from the Brookings Institution, where he was a senior fellow in the Foreign Policy Studies Program from 1995 until 2003 and served as interim director of Foreign Policy Studies in 2001.  Lardy has written numerous articles and books on the Chinese economy.

Photo credit: ericstone.com.