Why China Now Needs A Consumption Story

The country's economic models aren't working any longer and there is only one way out of the conundrum

- Vivek Kaul

As per the International Monetary Fund’s World Economic Outlook released in early October, China is expected to grow by 5% in 2023. This growth forecast is in constant terms adjusted for inflation and in the Chinese currency yuan. A growth of 5% in 2023 is better than growth of 2.2% in 2020 and 3% in 2022. On the flip side, it’s much lower than the growth of 9.2% per year achieved from 1982 to 2022, when the Chinese economy grew close to 33 times.

Further, the forecast for the next few years isn’t very inspiring—China is expected to grow by 4.2% in 2024, with growth expected to slow down to 3.4% by 2028.

This is quite a fall for a country which grew rapidly for decades at end. In this piece, we will try and understand why; what is China doing about it and what will make it work.

DIFFICULT TO SUSTAIN

The history of economic growth tells us that countries rarely grow at greater than 6% per year on a sustained basis. As Lant Pritchett and Lawrence Summers write in a research paper titled ‘Asiaphoria meets regression to the mean’: “Episodes of super-rapid growth (>6%) tend to be extremely short-lived." Other than China’s spurt over the last four decades, Taiwan and South Korea are the only two countries which grew at greater than 6% per year for decades at end. Taiwan grew at greater than 6% per year from 1962 to 1994 and Korea from 1962 to 1991.

In that sense, China “holds the distinction of being the only instance, quite possibly in the history of mankind, but certainly in the data, with a sustained episode of super-rapid (> 6%) growth" for a period of four decades. The point being that as any economy grows bigger, it finds it tougher to continue growing at a fast pace. This seems to be happening to China now.