China's structural shift

China’s growth has relied on exporting for the past three decades. This reliance is hardly sustainable for any country, let alone for one with an economy the size of China’s.

As such, China has embarked on a gradual move towards a consumption driven economy and is implementing reforms to make this shift possible.

With this shift, naturally, services feature high on the agenda.

Some macroeconomic indicators

Gross domestic product (GDP) growth has continued to slide as China’s economy grows, prompting China to look for alternative growth measures.

Foreign trade decreased in 2015 by 7% to 24.58 trillion yuan (US$3.74 trillion), of which exports were down 1.8% while imports dropped 13.2%.

Retail sales of consumer goods stood at 30.09 trillion yuan (US$ 4.57 trillion) in 2015, up 10.6% from 2014.

At the same time, online retail sales amounted to 3.88 trillion yuan (US$ 589.76 billion), up 33.3% from the previous year.

In 2015, the per-capita disposable income of urban residents stood at 31,195 yuan (US$ 4,742), marking a 6.6% increase from the year before.

All signs point to the potential for great domestic consumption in 2016 and beyond.

A focus on consumption would also necessitate a shift in focus to the services industries. In fact, services industries often rise remarkably in mid- and post-industrialisation eras.

In 2005, the services industries contributed to 41.4% of China’s GDP. By 2015, this had reached 50.5%, passing the 50% mark for the first time.

Structural reforms

What do supply-side structural reforms entail?

Tactically, they include cutting excessive industrial capacity, lowering financing costs for companies, destocking housing inventories, financial de-leveraging, and improving weak links to increase effective supply.

Fundamentally, a key exercise is to balance effective supply with effective demand, getting rid of structural surplus and addressing the shortage of high-quality products with value-added.

Investment in infrastructure, reduction in costs and creating an environment conducive to reforms is also necessary.

A shift towards innovation, human capital enhancements, and encouraging consumer spending completes the line-up.

This looks like a big list of reforms to undertake.

What this means is that China will take a few years to recover from the slowdown, as it seeks to restructure the whole country for another era of growth.

Implications

There is significant evidence to suggest that these structural reforms are indeed taking place.

Among other things, ‘Made in China 2025’ has kicked off, signalling the intent to elevate the manufacturing sector from a low-cost position to one that is highly advanced and value-added.

According to China’s Ministry of Industry and Information Technology, around 73 million tons of overcapacity in industrial production was eliminated in 2015. More tightening of excess capacity is set to happen.

Financial institutions have been encouraged to accept a broader range of collateral for extending loans to lifestyle-related businesses, such as retail, health, travel and sports.

The reform of the country’s residence registration, the hukou system, will be accelerated to unleash the spending potential of its rural population as rural residents move to urban cities to look for opportunities.

Current consumer behaviour suggests that domestic consumption will again rise in 2016, thanks in part to popular events such as Singles’ Day.

The world should look forward to these structural reforms. However, the reforms will also require domestic companies to become more competitive. In some industries that domestic companies can really up their game, it will present new challenges for foreign companies.

Published on interest.co.nz