Opinion | Why China must waste no time in pivoting to a consumption-based economy

Beijing must heed the lessons of Japan and Brazil, which in earlier decades ran heavily subsidised investment-based economies that collapsed because consumption had been hollowed out

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Diners gather at Fushansuo Market in Shinan, Qingdao, in Shandong province, on August 7. China’s overt focus on manufacturing implies keeping the yuan weak, but this reduces the purchasing power of households, shifting wealth from consumers to manufacturing. Photo: Xinhua

Published: 4:30pm, 25 Jan 2024

China’s 2023 economic data, just released by the National Bureau of Statistics, turned up few surprises. Gross domestic product grew by 5.2 per cent year on year in the last quarter and in 2023. While economists debate the veracity of this, there is a bigger issue at stake: weak consumption.

Wage growth tends to lag behind productivity gains and it gets worse when gross domestic product grows faster. This is an issue at the heart of China’s economic malaise.

Consumption has fallen as a proportion of China’s economy, estimated to make up just 53 per cent of GDP in 2022, down from over 63 per cent in 2000, and 65 per cent in 1980. For decades, China’s blistering economic growth has come not from consumers but from investment – and there is such a thing as too much of it, especially when investments become unproductive.

China’s investments make up a big proportion of its GDP, at an estimated 42.5 per cent last year, from 33.7 per cent in 2000, and 35 per cent in 1980. For too long, infrastructure and manufacturing have been two of the biggest pots for that investment.

But while expanding public investment can help ease infrastructure bottlenecks, scaling up too fast can be inefficient. It is difficult for infrastructure investments to be absorbed as they are costs of growth more than sources of growth.

Infrastructure investments make local government officials look good but there are significant diminishing returns as provinces become saturated with it. The overflowing public debt in high-growth Guizhou is a good example.