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Influence of Consumption Reform, Challenges It Faces and Policy Suggestions

Oct 15,2018

By Wang Qing, Liu Tao

Research Report Vol.20 No.5, 2018

I. Consumption in China displays Profound Reform in Multiple Aspects

Profound changes are taking place in the structure, mode, groups and market of consumption in China. Not only is the consumption level raised and structure upgraded, but consumption innovation is also in step with or even ahead of that in developed countries.

1. Consumption of medium- and high-end goods and services is the new highlight in structural upgrade

After 40 years of reform and opening-up, China’s per capita GDP exceeded USD8,800 in 2017 and reached the medium- and high-income level. Consumers pay more attention to the brand and quality of products and their demand for medium- and high-end goods increases rapidly.

Service consumption outgrows goods consumption and takes a rising proportion in the total consumption. Estimate shows that from 2013 to 2017, the per capita service consumption expenditure of Chinese people increased from RMB5,040.9 by 45.2% to RMB7,317.4, averaging 9.8% per year, about 2.1 percentage points faster than the growth of per capita goods consumption expenditure. In this process, the proportion of service consumption increased from 38.1% to 40% (Figure 1).

2. The application of new technologies and business mode innovations accelerate the reform of consumption mode

The development and in-depth application of emerging technologies represented by big data, cloud computing and AI strongly boost consumption innovation and profoundly change people’s consumption mode. Take online retail for instance. In 2017, the online retail sales in China reached RMB7.2 trillion, nearly 20% of the total retail sales of consumer goods, and it has maintained the average annual growth of over 30% since 2014, much faster than the growth of the total retail sales of consumer goods (Figure 2). Meanwhile, online-offline integration has come from the stage of exploration to the stage of accelerated development, enriching the consumption scenarios and effectively improving consumer experience. The online payment system has largely compensated for the unsound social credit system and boosted the fast development of online credit-based consumption. Thanks to the rapid development of new technologies and business modes, China has become the world’s second largest market of online consumption.

3. Structural changes of consumer groups continue to propel consumption expansion and innovation

In 2017, China had a middle-income group of 430 million people, the largest such group in the world[]①. Featuring stable income and the inclination for high-end consumption, the middle-income group is the backbone of consumption expansion and upgrade. Those born in the 1980s, 1990s and 2000s grow up with growing access to materials, education and fast-developing Internet. As young Internet users take up a large proportion and are happy to try new things, they become the mainstay that leads consumption innovation and expands emerging consumption (Figure 3). Moreover, in 2017, China had more than 240 million people aged 60 or more and 17.58 million newborns, over half of which were second children of their family. These two groups are growing into a highlight in the consumer market.

4. Integration of domestic and foreign markets accelerates the adjustment of consumer market

With the popularization of Internet technology, production and consumption resources are integrated and allocated on a larger scale and a deeper level, which improves the unified national market, speeds up the consumption upgrade in central and west China and the rural areas, and quickly unleashes the consumption potential. In 2017, of the 15 provinces, autonomous regions and municipalities whose per capita consumption expenditure outgrew the national average, 11 were in the central and western region, while consumption by rural residents increased by 7.2%[]②, three percentage points higher than that of urban residents. On the other hand, as China opens wider to the outside world, it is merging into the global consumer market at a faster pace. Following this new trend, high-quality foreign consumer goods and services all come into the Chinese market more quickly, better the supply in the domestic market and iron out the difference between Chinese and foreign markets. At the same time, cities with leading consumption, such as Shanghai and Beijing, become global consumer centers, with improving capability of leading the regional and global consumption upgrade and innovation.

1. Consumption is the main driving force of economic growth

Based on the development history of typical industrialized nations, when per capita GDP reached 11,000 international dollars[]③ or so, the economic growth rate would begin to slow down, economic structure change notably, and consumption increase quickly while giving a bigger boost to economic growth and innovation (Table 1). In China, as we stepped into a new development stage, the consumption rate steadily climbed up from 50.3% in 2013 to 53.6% in 2017, and the consumption contribution rate to GDP growth has increased from 47.0% in 2013 to about 60% in recent years. Consumption has been the biggest driving force of GDP growth for four years in a row.

2. Consumption reform is the “navigator” of economic transformation and upgrade

On one hand, the consumption reform, especially the increase in service consumption, is a powerful lead for the rapid development of service industry. According to the development history of the United States, France, Japan, the Republic of Korea and China’s Taiwan, service consumption gradually took up a larger proportion than goods consumption in the total consumption expenditure and maintained the uptrend (Figure 4). Especially after they entered the middle-income stage and the per capita GDP was around 11,000 international dollars, the proportion of service consumption enlarged more quickly along with the growing per capita GDP, and the increase only slowed down after per capita GDP exceeded 20,000 international dollars and the nations or regions entered the high-income stage.

In 2017, the added value of Chinese service industry accounted for 51.6% of GDP, basically the same as in developed economies during the same development stage. In light of the experience of developed economies, service consumption in China still has great potential and will increasingly drive up the development of the service industry.

On the other hand, the upgrade of goods consumption and the segmentation of consumer market play a growing leading role in manufacturing transformation and upgrade. Consumption reform exerts a major impact on the traditional development mode of manufacturing. Driven by the reform and innovation of all kinds of Internet-based new business forms and modes at the downstream of the supply chain, there is a higher demand for upstream manufacturing R&D to make quick responses and precise marketing. Emerging modes of production and organization, such as customization and crowd-funding, have triggered a manufacturing reform that is demand-oriented, information-centered and based on flexible manufacturing technology.

II. Consumption Reform is an Important Support for High-quality Economic Development

The profound consumption reform provides a new driver of China's economic growth. It will promote the optimization of economic structure and shift of growth drivers on both the supply and demand sides, and provide the important market foundation and innovation guidance for shifting from high-speed to high-quality development.

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