How China’s Consumption Will Quietly Explode

The author is ANZ greater China chief economist Liu Li-Gang

China’s private consumption was around US$3.3 trillion in 2013, almost as large as Germany’s GDP. However, there is still huge room for Chinese consumption to grow at a fast pace. China’s private consumption represents only 36% of its GDP, compared to the world’s average of 60%.

China’s consumption will be boosted by a set of ongoing and expected structural reforms. The establishment of a universal medical insurance scheme and a minimum pension in the rural sector will substantially reduce precautionary savings and promote consumption.

The rural land reforms will also transfer wealth from the state to village residents, creating an enormous wealth effect. Household earnings will be lifted by rising wages and labor productivity.

A re-balancing China means consumption growth will soon outstrip GDP growth. By 2020, China’s private consumption will represent 44% of its GDP and will be around 70% of the size of the U.S. consumer market, compared with just 40% today.

China’s consumer sentiment will exert a larger impact on economic growth, the inflation outlook, and monetary policy.

China’s rising middle class will help drive the consumption growth. Over the next few years, 100 million more middle-income households will enter the market and their spending will make up two-thirds of the total urban consumption, compared with just one-third in 2012.

The number of affluent households that make up China’s top 5% of income earners today will expand threefold by 2020, creating additional consumption demand of RMB6.5 trillion or about US$1 trillion in today’s value.

The consumption by affluent households will constitute 26% of total purchase by urban households.

But ultimately, China’s consumption boom will be empowered by the emergence of the middle class, turning the consumption-to-disposable income ratio from 76% in 2012 to around 82% by 2020.

(The article has been edited for clarity)

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