Strong characters

China acts to boost domestic consumption amid falling demand from Europe, while workers strike for better pay and conditions. Tsering Namgyal examines the impact of industrial unrest on the country and overseas investors.

Some also say that China has a looming pension crisis as a result of the one-child policy. The Chinese government had been trying to expand health and pension benefits beyond the state-owned enterprises core, which would add an increasing burden at the national level.

“Beyond this, I do not see a tremendous effect on the labour market spe-cifically due to the one-child policy,” says Hurst.

The debt crisis in Europe adds to the pressure on China to rely less on export income and more on domestic consumption. The European Union is China’s biggest trading partner, and a weak euro could push Europeans to buy fewer imports. In addition, an appreciating Chinese currency is making Chinese products more expensive overseas.

”I do not believe that things will stop at Honda and Foxconn”

Finally, the important question is whether China will succeed in increasing its domestic consumption. The country is at a difficult crossroads. Rising wages might help to increase consumption but the rising cost would take a toll on China as a destination for investors. Structural factors such as the poor banking system effectively impede efforts to increase the ratio of consumption significantly as a share of GDP in the short term. Yet the ratio will have to increase in the medium term, experts say, for China’s growth to continue and global rebalancing to occur.

China’s low share of private consumption in GDP is the result of a combination of factors: its relatively low share of household income, the low share of employment in the services sector, the level of financial development, changes in the real exchange rate, and its ageing population, among others.

China has a relatively low share of employment in the services sector because of its export-driven economy, which creates more jobs in the capital-intensive areas.

Meanwhile, resear­chers at the International Monetary Fund (IMF) say that China is not seeing the significant transfer of labour to the services sector as countries such as Japan and South Korea experienced during their growth path in the past few decades. A higher ratio of jobs in the services sector is seen as helping to boost consumption.

Kai Guo and Papa N’Diaye, of the IMF’s Asia Pacific Department, write in a working paper that China’s anomalous performance is not the result of historical or cultural factors and thus can be addressed through policy measures. These include further increasing household income, developing capital markets and raising the share of employment in services, according to the paper, Determinants of China’s Private Consumption: An International Perspective, published in April 2010.

While these measures might work, the impact is unlikely to be felt in the near term, which is not the best news for the Chinese government.

“I don’t think it will be easy to radically reorient the economy away from exports and toward domestic consumption, however,” says Hurst. “Any such shift will take quite a long time and may come with significant costs.”