|Investment Research Group|
Like many countries before it, China is moving away from being a manufacturer of cheap goods for world markets into becoming a wealthier and more developed economy. Cheap goods increasingly are being made elsewhere.
These trends are supported by investment banking giant Morgan Stanley, which believes Chinese economy is heading for a “golden age” of consumption-driven economic growth over the next 10 years.
While economic growth will slow from the double digits that China has achieved annually over the past 30 years, consumption will take over from exports as a driver. By 2020, China’s consumption could equal two-thirds that of the US level and account for about 12% of the world total.
Morgan Stanley believes the Chinese economy is at an “inflection point” similar to that of Japan in 1969 and of Korea in 1988. Such economies, when they moved beyond this inflection point, tended to show rapid internal growth.
A Golden Age for consumption would feature two key aspects, a strong expansion of consumption and a change in the type of consumption.
It identifies eight drivers that would help to usher in a Golden Age for consumption in China:
1) economic growth;
2) wage increases;
3) development of service industries;
4) public expenditure;
5) income redistribution;
6) aging population;
7) urbanisation; and
8) level of economic development.
The primary source of consumption growth stems from household income growth, which is should grow steadily, which should still increase at an average rate of 8% a year.
China’s service sector is underdeveloped. Since the sector tends to be labour intensive, this has made China’s growth largely ‘jobless’. Looking ahead, as the service sector develops, the labour intensity of the economy will likely increase, helping to boost household income growth.
Labour market development has been underway for several years in China, which should underpin sustained wage growth over the long run.
A declining saving ratio also should boost consumption growth, given income growth.
Consumers’ preference and taste for different products and services typically reflects the level of economic development. In this regard, China is perhaps special in that, as the economy develops, a massive structural shift is also taking place. That is rapid urbanisation, which will have an important impact on consumption trends.
If Morgan Stanley is right, the outlook for the global economy and markets is positive as what the world needs now is a new consumer market to replace the mature and slowing US one.