What do economists mean when they say China must transform its economy to depend on domestic demand?
Posted by admin in Finance Thursday, 27 October 2011 20:10 2 Comments
I see news about China’s over dependence on exports. The US recently said it needs to rely more on creating domestic demand in order to transform its economy. What does this domestic demand mean? How can it help China to transform from and export oriented economy?
Export oriented policy means China has used scared resources to produce goods as cheap as possible for foreigners.These valuable resources should be used for the Chinese. Most of Chinese are still poor. China ranked 99 in terms of per capita income. That means the growth of GDP has brought welfare for a small group of Chinese.Average people are suffering from low wage rate and environment degradation. Growth of China should mean well-being for average Chinese, not only the elite.
The standard GDP equation is basically:
Y = C + I + G + (X − M)
http://en.wikipedia.org/wiki/Gross_domestic_product#Components_of_GDP_by_expenditure
In most countries, most of the economy is devoted to producing goods and services for the domestic market.
http://paul.kedrosky.com/archives/2009/08/the_china_consu.html
For example, the U.S. consumption C is about 70% of the GDP and investment I is about 13%
https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
In China, consumption accounts for less than 37% of the GDP, which is too low, and investment accounts for almost 50%
http://www.scribd.com/doc/500177/Chinese-Consumption-Household-Income-IMF-Working-Paper
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
which is much too high
Most economists agree that if China is going to continue growing, it is going to have to produce more goods for its own people – if only because it can’t produce all that much more for the rest of the world.
http://wallstreetpit.com/12688-the-difficult-arithmetic-of-chinese-consumption
http://www.mckinsey.com/mgi/reports/pdfs/unleashing_chinese_consumer/MGI_Unleashing_Chinese_Consumer_full_report.pdf
One reason that the Chinese aren’t buying more is government policy with respect to the currency. The government has kept money very tight within the country even as it has undervalued the currency with respect to the global market. It can do this because of currency controls that require all money coming in and out for the country go through the government banks.
http://modeledbehavior.com/2010/10/19/importing-paul-krugman/
So if the government were to eliminate capital controls and let the yuan float on the international markets, Chines would be start buying more, both from the outside world and from their own factories. The Chinese economy would continue to grow and almost everyone would be better off.
Those that wouldn’t would be the unskilled Chinese workers who couldn’t compete with the Vietnamese and the Indians once the yuan is worth more on the world market.
http://www.csmonitor.com/World/Asia-Pacific/2010/0912/Vietnam-seeks-gains-as-China-labor-costs-rise
This wouldn’t affect most of the workers, but the government is afraid that it would affect too many:
http://chovanec.wordpress.com/2010/08/04/rising-labor-costs-and-value-add-in-china/