Sunday, November 6, 2011

Globalization: China - Growing Up

The global economy is struggling. Growth in the U.S. is sluggish and Europe seems to be close to a recession. But just in time China is signaling that she is growing up. The giant is moving slightly away from an export dependent economy to a more consumer driven system, which will strengthen China`s role as an engine of the global economy.

Recently we got news that the Chinese exports growth is slowing down. In September shipments to foreign markets rose 17.1% compared to last year, down from 24.5% in August. Instead China`s retail sales, a large part of consumer spending, accelerated to 17.7% on a year-ago basis in September, after growing 17% in August.

These numbers show that the Chinese economy is ripening. Today the Chinese economy relies on export-led growth and the industry focuses on shipments to markets in Europe & U.S. Private consumption accounts for only a third of China`s economy.

This is very different from large modern economies like the U.S.. There, consumer spending is the engine of the economy and accounts for around 70% of GDP (national income). Dominance of exports is typical for small countries with tiny domestic markets and for emerging countries which need exports to build up an efficient and productive industry. China, which has a gigantic domestic market with around 1.2 billion people, is rapidly evolving to a modern economy.

This change is fueled by a rising affluent middle class and rapidly climbing salaries. China watchers also claim that the growth of the domestic consumer market is backed by the government. "The Communist Party knows very well that its legitimacy rests on delivering consistent annual increases in prosperity" writes Alessandro Magnoli Bocchi, Chief Economist of Kuwait China Investment Company ( Observers report that the government in Beijing is now working to reduce the export-dependence and favors the expansion of domestic private consumption (tax-policy) to reduce the economic dependence upon the U.S. and Europe.

This is good news for the global economy. The rapid growth of the Chinese consumer demand implies growing exports for U.S. and European companies and should boost the global economy.

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