China, as one of the world’s leading economic powers, has been heavily dependent on investment and exports for economic growth since its opening and reform, which allowed for a sustained average annual growth rate of 10% until 2011. But the Chinese government, realizing the limits of such investment-driven growth model, has been pushing for a paradigm shift to a consumption-driven growth since the beginning of the 12th Five Year Plan (2011~2015). The switch is a demonstration of the government’s firm determination to lower its dependence on investment for economic growth and expand consumption, even at the cost of decreased growth rates. But since 2012, a sluggish global economy has led to a slowdown of exports, investments and consumption, causing China’s economic growth to dwindle to around 7% and thus, signaling the country’s entrance into the “era of new normal.”
Considering such a background, this research aims to investigate why consumption was not stimulated to the extent the Chinese government wanted, using an empirical analysis; it also seeks to evaluate China’s efforts to boost consumption, and, from them, its consumption-driven growth strategy. Finally, this study analyzes the impact of China’s consumption-oriented growth model on the Korean economy, presenting several suggestions for establishing Korea’s new China strategy in this “era of new normal.”
This paper is divided into six chapters. After the Introduction, Chapter 2 looks into Chinese government policies to boost consumption, which began in earnest after the Global Financial Crisis. Three main policies are especially emphasized: China’s strategy to decrease household saving rate, its strategy to increase household disposable income and its strategy to change the consumption structure.
In Chapter 3, this paper investigates the trend of China’s household consumption, its consumption gap across various strata, its consumption structure and the trend of the consumption market according to industry sectors. According to an index that reveals China’s consumption expenditure, China’s household consumption increased more than five-fold from around 4.7 trillion yuan in 2000 to around 24.15 trillion yuan in 2014. But income disparity, an unwelcome side effect of China’s high-speed growth, is widening the consumption gap between urban and rural areas, between classes, and between regions. China’s retail sales growth, which had been rising steadily rise since 2000, has slowed after 2010. Reasons for the slowdown include retreating consumer confidence due to the recent economic recession, general preference for savings due to insufficient social security net, etc.
In Chapter 4, widening income disparity, demographic changes, an inadequate social security system, low urbanization rate, slumping development of consumer finance and high housing prices are presented as the factors responsible for constraining the growth of China’s domestic consumption, and efforts were made to analyze the present condition of each factor. After 2009, urban-rural income gap narrowed to a certain degree, but disparity across regions (Eastern coastal regions versus Western inland regions) and the social stratum, visible in the Gini coefficient, remain large.
In Chapter 5, this paper uses province-level data to conduct an empirical analysis to examine factors that determine China’s domestic consumption. The results show that factors including economic growth, level of economic development, household income, investment, elderly support ratio, development of the service sector, financial development, urbanization, education expenditure, and the rise in the minimum wage all have meaningful influence on China’s domestic consumption.
Economic growth and economic development were found to have a meaningful negative correlation with consumption. Household income and development of the service sector were found to have a meaningful positive correlation to consumption; while investment and elderly support ratio had a meaningful negative correlation; this indicates that low labor share, underdevelopment of the service industry, high investment rate and high elderly support ratio have limited the growth of China’s household consumption.
Among the China-specific factors, financial development and urbanization were found to have a meaningful positive influence on household consumption.
Regarding government policies, the expansion of fiscal spending for education after the financial crisis has contributed to the increase in household consumption.
On the other hand, expenditure on medical, social security and subsidized housing did not have any meaningful influence on household consumption. Minimum wage increases have been found to have a meaningful positive influence on increasing household consumption in the coastal regions; in the coastal areas, the government policy of raising the minimum wage has been successful to some degree.
Regarding investment, investment on manufacturing and the real estate sectors have mostly increased profits of companies, rather than that of households, restricting the growth of household consumption. Investment on farming and the service sectors, on the other hand, led to a growth of household income and consumption.
As China’s growth paradigm shift is expected to greatly impact the Korean economy, this research proposes Korea’s new China strategy based on the above findings.
First, against the backdrop of China’s declining growth as a consequence of entering the “era of new normal,” Korea faces an urgent need to develop new markets.
Second, more than 80% of Korea’s investment in China has been concentrated in manufacturing and those directed to the service sector has been meager, meaning Korea must speed up its entry into China’s service market.
Third, as China’s consumption market is expected to continue growing, Korea should search for a new export strategy to China, with less emphasis on processing trade and more on expanding the consumer goods market. At the same time, Korea should increase its share of investment to target China's domestic markets, accelerating the change in its investment structure.
Fourth, Korea should establish a step-by-step strategy to target the Chinese market: while targeting general consumer goods in the early stage, Korea should ultimately take advantage of the Chinese government’s so-called “new form of urbanization” plan. At the same time, Korean companies and the Korean government should seek to actively participate in large scale infrastructure projects related to the “One Belt One Road” strategy.