The report to the 19th CPC National Congress pointed out that the principal contradiction facing Chinese society is between unbalanced, inadequate development and the public’s ever-growing demand for a better life as socialism with Chinese characteristics enters a new era. To resolve the principal contradiction of the new era, it is essential to start with the supply side in order to improve factor quality and supply structure while enhancing the potential growth rate and development quality by spurring innovation.

At the 2016 Central Economic Work Conference, Xi Jinping, general secretary of the CPC Central Committee, stressed maintaining stability while seeking progress, adhering to new development ideas, advancing supply-side structural reform and moderately expanding gross demand. At the 2017 conference, he reiterated the importance of the aforementioned issues and called for attention to the evolution of the principal contradiction facing Chinese society and leveraging the fundamental role of consumption. 

In this context, a scientific recognition of demand is an integral requirement to maintaining stability while seeking progress. Supply-side structural reform should address long-standing structural problems of growth. Not only should innovative microeconomic agents be fostered, but efforts should also be made to adjust factor quality to the upgrading of economic structure and promote institutional reform to adapt to the new normal. This is a systematic, holistic and long-term reform. Stable gross demand will lay a solid groundwork for the progress to be made in supply-side structural reform.

Role of consumption

Final consumption is the main contributor to maintaining medium-to-high growth. Data about the contribution of consumption, investment and exports to economic growth show that the contribution rate of final consumption has generally maintained an upward trend since 2008—particularly 2010. In 2016, it contributed 64.4 percent to the GDP, boosting growth by 4.3 percentage points.

At the same time, the contribution rates of investment and net exports have both trended downward. In particular, net exports made negative contributions to economic growth for most of the period. In 2016, the contribution rate of net exports was negative 6.4 percent, pulling growth down by 0.4 percentage points. 

In general, the contribution of final consumption to economic growth has been stable, boosting growth by 3 to 5.6 percentage points after 2000. Investment contributed unsteadily in different years, increasing growth by 1.9 to 8.1 percentage points.

Given its decreasing contribution, investment will hardly become an engine of growth. Moreover, prevailing trade protectionism in the wake of the 2008 global financial crisis will add uncertainties to net exports, making it difficult to stabilize growth. 

It is noteworthy that final consumption is becoming the most important boost of the economy exactly at a time when China’s economy is slowing down. The ratio of consumer spending to the GDP in high-income countries averaged 61.4 percent in 2011. The ratios of the United States and the United Kingdom were higher—69 percent and 64.6 percent, respectively—while those of Japan, Germany, France, Canada and Italy stood around 60 percent.

The similar contribution of final consumption to China’s GDP indicates that the Chinese economy is transforming from an investment-driven, catch-up economy into a consumption-driven, mature one with medium-to-high growth. 

Sustained income growth essential

The growing population is a basic condition for consumption to act as the primary driver of growth. Since the family-planning policy was loosened, China’s demographic structure has been changing for the better.

Demographers predict that the total population of China will peak at approximately 1.45 billion. In 2017, the figure was 1.39 billion. 

From the CPC Central Committee’s 2013 decision to allow families to have a second child if either parent was an only child to the announcement of the universal two-child policy in 2015, the birth rate rose steadily, reaching 12.43 percent in 2017. The natural population growth rate arrived at 5.32 percent, basically back to the level of 2003.

This means the universal two-child policy has begun to have a positive impact on fertility decisions and will progressively help to optimize China’s population age structure, thus improving the pattern of consumption and providing population guarantees for consumption to fuel economic growth. 

Continued income growth is a realistic condition for consumption expansion. Despite the economic slowdown in recent years, the incomes of urban and rural residents have maintained rapid growth, even more rapid than economic growth after 2010.

In 2017, the disposable income per capita reached 25,974 yuan, growing 9.0 percent year-on-year and 7.3 percent in real terms. That year the real GDP growth was 6.9 percent, with the GDP per capita up 6.3 percent. 

When it comes to income structure, the disposable incomes per capita of urban and rural residents in 2017 were 36,396 yuan and 13,432 yuan, up 8.3 percent and 8.6 percent from 2016, respectively. The real growth rates were 6.5 percent and 7.3 percent after adjusting for inflation.

The per capita disposable income of rural residents grew faster than that of urban residents, which hints at a narrowing rural-urban income gap. It is an important guarantee for the upgrading of rural residents’ consumption structure and suggests huge potential for sustainable growth of consumption. 

Statistics also show that China’s consumption abroad grew 25.2 percent annually from 2005 to 2014, twice the growth rate of the total retail sales of consumer goods. In 2014, the consumption abroad reached 164.9 billion dollars, accounting for more than 10 percent of global overseas consumption and making China No.1 in the world for three years consecutively in this regard.

Therefore, urban residents have enormous demands for high-end consumption, which is also the objective requirement for high-quality growth. Hence the role of consumption in growth will be ensured by promoting sustained income growth and reasonably unleashing the consumption potential of urban and rural residents alike. 

Removing barriers

Although the great consumption potential of urban and rural residents is the core for consumption to play the fundamental role in economic growth, there are some structural factors inhibiting the expansion of consumption.

In terms of income structure, attention should be paid to abnormalities of income distribution during economic downturn. Although incomes have grown faster than the economy, economic slowdown will lead to slowing income growth, while income growth rates of different groups have been divided. 

The change in the Gini coefficient reflects the differences in income growth rates of different groups. The coefficient decreases when the income of middle- and low-income groups grows faster than that of high-income groups, and vice versa.

Data show that the Gini coefficient of China has been falling since 2008, due primarily to the narrowing income gap between urban and rural residents, and rising income of middle and low-income groups. 

It is worth noting that the country’s Gini coefficient reached 0.465 in 2016, up 0.003 from 2015 and breaking the downtrend since 2008. Specifically, the income of the high-income group in the five-rank hierarchy grew 8.65 percent, close to that of the medium-to-high income group and higher than those of the remaining three groups.

In 2017, the income growth structure didn’t change dramatically. The widening of the income gap will cause changes in consumer behavior. The decreasing income growth of middle- and low-income groups will impede the release of their consumption potential. 

Regarding consumption structure, importance should be attached to significant disparities of different income groups in consumption propensity. It is estimated that the marginal propensity to consume (MPC) of urban and rural residents were 94.74 percent and 76.59 percent, respectively, in 2000. But they fell to 70.91 percent and 70.90 percent in 2010.

A gap grew thereafter, as the MPC of urban residents started to rise—back to about 80 percent in 2015—while that of rural residents did not stop falling until 2014, to 74.9 percent in 2015. The reasons vary though both grew eventually. 

The domestic shortage of high-quality supply was the major factor restricting the consumption growth of high-income groups represented by urban residents, which can be shown by ever-growing consumption overseas. The decline of consumption among low-income groups represented by rural residents was mainly attributable to income constraints since domestic supply can meet their upgraded consumer demands.

Studies show that low-income groups feature high income elasticity in expenses like durable consumer goods, education, medical care and housing. When their income is insufficient to meet upgraded consumer demands, they tend to save what they earn, which is unfavorable to unleashing their consumption potential. 

All in all, final consumption is the key to maintaining medium-to-high growth, which is attributed to the country’s large population and sustained income growth. Nonetheless, structural imbalances between supply and demand present a barrier to the expansion of consumption. Thus, when accelerating supply-side structural reform, it is vital to improve the supply structure and boost demand at the same time to prevent possible economic fluctuations.

Yang Xinming is a research fellow from the Institute of Economics at the Chinese Academy of Social Sciences.

(Edited and translated by CHEN MIRONG)