Major Trends in China: The Next 10 Years
As Xi Jinping and Li Keqiang take the reins of power from Hu Jintao and Wen Jiabao, they face many challenges, some so staggering that one wonders how they can ever be addressed. The major themes and trends that will influence the course of China’s economic development over the next ten years will be defined in large part by the steps already taken by China’s outgoing leaders, as well as by the actions that Xi and Li will take in the coming years, to meet these challenges.
What are these major themes and trends? I believe there are five.
1. Consumption: The fact that domestic consumption in China is already well underway seems to be the best kept secret in the world. Most accounts of China’s economy speak as though this is a trend that has yet to develop. However, even with per capita Gross Domestic Product (GDP) of only $5,414, and even though China’s consumption accounts for only 35 percent of the country’s GDP, China is already the largest market in the world for passenger cars and most other consumer products. The China market will only grow in importance in the years ahead.
Over the next 10 years, global spending on consumer goods is expected to increase by $4.8 trillion, from $7.3 trillion in 2010 to $12.1 trillion in 2020 according to McKinsey Global Institute. China will account for a stunning 36 percent of global growth in consumer spending during this period. By 2025, Shanghai and Beijing will together host 14 million households with annual incomes above $20,000 and will rank 4 th and 5 th, respectively, in the world in this regard. Between 2010 and 2020, three of China’s cities will rank in the top five globally in terms of growth in spending on consumer goods.
2. Addressing Income Disparity: Average per capita incomes of China’s 550 million “haves” is up to eight times greater than China’s 750 million “have nots.” Addressing China’s income disparity will be one of the big challenges facing China’s new leadership. In addition to boosting the incomes of China’s rural population, putting in place a greater safety net, including improved access to affordable health care, will be an important initiative.
3. Urbanization: In the coming years, 260 million Chinese will move from the countryside into China’s cities. Between 2007 and 2025, the world’s top 10 cities in terms of population growth will include six Chinese cities that will add 34.6 million people during this period. In terms of growth in GDP, six Chinese cities will rank among the top ten cities in the world. In these six cities alone, growth in GDP will total $3.6 trillion from 2007 to 2025.
4. Environmental Protection: The continued industrialization of China’s economy that must occur in order to address the country’s income disparity will further strain China’s environment. Air quality is bad across the country, and lung cancer and cardiovascular illnesses are already rising and could get worse in the future because of factory emissions, vehicle exhausts and cigarette smoke, said Zhong Nanshan, President of the China Medical Association.
China’s water situation is no better. China is home to 20 percent of the world’s population, yet only holds six percent of the world’s water resources. China’s water demand is expected to reach 818 billion cubic meters, but there is only 616 billion cubic meters available. Beijing has about 100 cubic meters of water available per person, well below the U.N. standard of 1,000 cubic meters per person, a threshold used to measure chronic water shortage.
Meanwhile, industrial and biological pollution has contaminated almost 90 percent of the underground water in Chinese cities. The World Health Organization (WHO) estimates that one out of four (300 million) Chinese do not have daily access to clean water, and that one out of two (700 million) are forced to consume water below WHO standards.
Efforts to clean up China’s environment will be a major theme of the new administration.
5. Financial Reform: Small and medium-sized enterprises (SME’s) account for the major portion of job growth in any country, including China. Yet, China’s SME’s have found it particularly difficult to access capital. In response, “underground finance” and a shadow banking system have developed as a way to supply credit to private companies, although at exorbitant interest rates. Despite being an illegal activity, until March that is, underground finance has become a big business in China. Last October, UBS estimated that “private lending,” the term used for the informal networks of money lenders that have developed outside of China’s banking system, could be between two trillion yuan ($317 billion) and four trillion yuan ($634 billion).
In March, 2012, China announced reforms in the coastal city of Wenzhou that would legitimize underground finance. These reforms are now spreading to other parts of China as many new “micro finance” companies are being granted licenses to provide much needed capital to China’s SME’s.
Look for more of the same over the next 10 years. Further reform of China’s banking system and the development of China’s capital markets will fuel a new round of growth and wealth accumulation and will be one of the major new trends affecting the country.