Multinational corporations cannot ignore the powerhouse that is the Chinese economy. Investors have poured billions of dollars into the country at the same time China’s vast citizenship has emerged as an active global consumer base – accelerating growth for the first time in six years. Let’s look at how China’s manufacturing and consumer spending throughout 2018 will impact economic growth.
Andrew Duguay, Prevedere’s senior economist, recently provided a data-driven explanation on why the Chinese economy has reached an inflection point and projects that its economy is poised for healthy economic growth over the coming year. See the full forecast here.
Current State of the Chinese Economy
For the past 30 years, China has been on an unprecedented streak of economic growth as the country has become the manufacturing hub of the world. However, the past five years have seen a slow down in growth rates. In 2017, China’s GDP saw YOY growth of 6.8% – up just 0.1 percentage points from 6.7% in 2016 – both which are considered extremely mild in a country accustomed to rates of 8-10%. What does this dip in growth rate mean? China’s economy has grown to the point where it must mature from being a producer for the world to more of a consumer market.
China’s Forecast for 2018
For those with an eye on China in the new year, understand that the country is going through a fundamental shift in how it views economic growth. Strong government involvement will be crucial to continued success as the country is moving from manufacturing-driven growth to an influx of consumer spending. The Chinese government plans to emphasize growing its consumer base and consumer services sector while also evolving manufacturing from “Made in China” consumer products to facilitate high-tech and other value-add industries.
As Chinese consumers play a bigger role in the country’s growth, consumer sentiment statistics will be increasingly important for executives to monitor. Currently, China’s consumer sentiment numbers are the highest since before the 2008 market crash, driven by optimistic Chinese millennials and increases in higher-end jobs and wages.
The State of China’s Manufacturing
Investors considering Chia’s manufacturing should tread lightly. The country is losing its competitive advantage of cheap labor as costs are quickly rising. Wage growth has grown 280% in the past decade – compared to 24% in the U.S. over the same time. Other countries like Malaysia, Bangladesh, the Philippines and Vietnam are becoming more appealing as lower wages provide an advantage.
Additionally, Duguay predicts the Chinese government will promote policies allowing manufacturers to grow while being protected from international competition. As these policies begin to take shape, there will be a shift from an emphasis on growth to one of manufacturing profitability.
The Chinese Consumer
From 2014-2016, the USD’s appreciation hurt Chinese consumers while benefiting manufacturers. However, the Yuan has appreciated since December 2016 and continues to grow – putting more weight on Chinese consumption as the currency strengthens simultaneously with consumers’ buying power.
As the Chinese flex new consumer muscles, executives must take note of how their spending habits differ from Americans’. Chinese consumers have historically been conservative and saved more than their American counterparts. Over time, spending and debt will increase, but at a moderate pace as consumers adjust to their new spending power. Chinese consumers typically prefer debit cards to credit cards; only 25% of consumers in the country have credit cards, and of that, 71% of consumers pay off balances in full, compared to only 55% in the U.S.