China looking to domestic sector to maintain growth.

Neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. While China’s economy is synonymous with exports, private consumption has been the largest component of Chinese GDP growth since 2014. With household spending at 39% of GDP in 2018, compared with nearer 70% for more developed economies such as the U.S. and the U.K., it also has considerable potential for further growth. Remember that Aggregate Demand = C+I+G+(X-M).

S&P Global

At the annual planning meeting last month China decided to focus on expanding domestic demand and achieving a major breakthroughs in core technologies. President Xi Jinping’s administration is looking at being self-sufficient in a range of technologies that have in the past been dominated by US firms. An obvious reason for the switch to domestic consumers is that with COVID-19 there is increasing instability and uncertainty around the international environment. A temporarily suspended trade war with the US has emphasised the importance of ending its dependence on foreign technology supplies. President Xi Jinping outlined a new dual circulation economic strategy which came about with the potential decoupling with the US and deglobalisation which would negatively impact the demand for Chinese exports. The dual circulation economic strategy consists of:

  • The importance of strengthening domestic demand
  • Technological innovation over closer integration with the outside world

Growth targets
China has set targets for economic growth in its 5 year plans – this is its 14th 5 year plan. It is expected that annual average growth to be around 5% down from previous years where it was expected to be 6.5% – 7.5%.

Final thought
China needs a lot more domestic consumption as newly produced goods will just become surplus to requirements. This will also mean increased levels of corporate debt.

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