china

China’s inward-facing ‘dual circulation’ strategy leaves many wondering where domestic demand will come from

A lack of purchasing power among the people is flying in the face of Beijing’s economic plan to create a massive domestic market to curb nation’s reliance on exportsBeneath surface of China’s weak consumer spending is a national wealth-distribution system that favours the state and the wealthy instead of average households

Beijing’s new economic plan of building up its domestic market to reduce China’s reliance on exports risks being undermined by a lack of purchasing power among the people. Illustration: Kuen Lau
Beijing’s new economic plan of building up its domestic market to reduce China’s reliance on exports risks being undermined by a lack of purchasing power among the people. Illustration: Kuen Lau

Jack Wang, a former overseas manager for Huawei, decided to quit his job in 2019 after years of being separated from his family in Henan province. He had big plans to build an online business there, selling local farm products such as honey and sesame to urban consumers willing to pay a bit more for better-quality goods.

One year later, having burned through 300,000 yuan (US$44,000), Wang says he made a mistake in gauging the demand and spending power of Chinese consumers.

“I overestimated domestic demand,” he lamented. “In fact, the domestic market is very competitive, and the consumption power of ordinary people is not as good or as high as I had imagined.”

To save money, he has moved his office from a fancy tower in Zhengzhou, the provincial capital city, to a drab building in a rural county with an annual rent of just over 10,000 yuan (US$1,500) per year.

Wang has even attempted to branch out into other products. A friend introduced him to an export manufacturer in the southern industrial city of Dongguan who had a huge inventory of socks in his warehouse that were not selling because export orders had dried up, but Wang found it just as hard to sell the socks.

“It didn’t work at all. The socks for export were of good quality, but the manufacturer wanted at least 5 to 10 yuan for each pair. Local people usually buy four or five pairs for 10 yuan. Few will buy socks beyond this price range,” Wang said.The unsuccessful business ventures forced Wang, in turn, to cut his own discretionary spending. Wang says that few of his friends and relatives are expanding their spending because the pandemic has reduced incomes and darkened financial prospects across the manufacturing and services sectors.Wang’s story reflects a larger problem in the world’s second-biggest economy – weak consumer spending as a result of a state-led growth model. And the lack of consumer purchasing power is flying in the face of Beijing’s new economic plan of creating a massive domestic market to reduce the nation’s reliance on exports.

President Xi Jinping announced in May that a new “dual circulation” plan, focusing more on the domestic market, would be China’s strategic approach to surviving and thriving in an increasingly unstable and hostile world.China’s economy is turning inward, but will weak domestic demand undermine Xi Jinping’s vision?4 Aug 2020

Whether the strategy will be a success remains an open question among researchers.A report issued this month by China’s Development Research Centre under the State Council, the government’s cabinet, predicted that the nation’s per capita gross domestic product will reach US$14,000 by 2024, and that China’s market will be bigger than that of United States by 2025, with at least 560 million “middle-income” consumers.

But others doubt whether China can truly shift its growth engine from state-led investment and exports to consumer spending without painful reforms of its growth model and wealth-distribution system.Michael Pettis, a finance professor at Peking University and a long-time observer of China’s economy, said late last month that the new strategy is really just an old plan to rebalance the economy towards consumption, but the plan would require a massive wealth shift from the state to households – a process that will not be accomplished easily.

Xu Fa, who manages a gold and jewellery store in the southern city of Guangzhou, said spending at the chain’s stores across the country has dropped significantly this year. “Demand in the second quarter recovered from the low base in the first quarter, especially for gold, thanks to a rising gold price,” Xu said. “But sales of non-gold products such as diamonds have been bleak.”

Xu said his company has opted for deep price cuts to reduce inventory and generate sufficient cash flow. “Items that were priced at 9,000 yuan last year are now being sold at about 5,000 yuan. And we are not alone – you can see that [all types of retailers] at shopping malls across the country are doing the same thing.”

While Xu is finding it challenging to sell luxury goods because urban consumers are tightening their belts, Luo Zhaoliu, who produces fermented bean curd in a rural village in Jiangxi province, is also worried about the outlook for his business.

Luo said he sold 160,000 jars of bean curd, priced at 12 yuan each, in the first eight months of last year, but only 100,000 the same period this year. His product offers a cheap way to add flavour to Chinese meals.

“There are at least 4,000 factories across the country that have started to produce fermented bean curd and chilli sauce this year, and the competition is fierce,” Luo said.Sales to inland provinces have been hit particularly hard this year – a sign that relatively poor Chinese consumers are cutting living expenses to the bone. “If you go to any grain and oil shop in the countryside, you will find a decline in sales of all goods except for rice and cooking oil”, which are essential goods, he said.

As a result, Luo said he is now trying to sell his fermented bean curd in smaller portions at a cost of about one yuan (US$0.15) each. “This way, maybe some would like to buy the new package, if they are unwilling to buy a jar for 12 yuan,” he said.

Official figures show that China’s retail sales of goods, often used as a gauge for overall consumer spending on goods and services, shrank about 10 per cent in the first seven months of this year from a year earlier. But the real decline in consumer spending could be even deeper, as the retail sales figures include government spending at shops and restaurants.

Beneath the surface of China’s weak consumer spending is a national wealth-distribution system that favours the state and the wealthy instead of average households, resulting in an increasingly widening wealth gap.

Premier Li Keqiang said at a press conference last month that 600 million of China’s 1.4 billion residents live on a monthly income of just 1,000 yuan (US$146).Last year, a similar point was hammered home by Cao Dewang, an entrepreneur and chairman of one of the largest glass manufacturers in the world. He rose to international fame after appearing in the American Factory documentary and saying that between 900 million and 1 billion Chinese people “don’t have any consumer power”. The clip has been widely circulated online in China.

If China’s domestic demand proves insufficient, the nation will have to rely on demand from abroad to keep its factories humming. Teng Tai, the director of a Beijing-based private think tank studying supply-side reforms, was quoted recently by the official Securities Times as saying that it is impossible for China to rely solely on the domestic market to sustain its massive manufacturing apparatus.

“There is a set of figures for reference: China makes 10 billion hats, 10 billion pairs of shoes, 30 billion pieces of clothing, and 200 million tablets and portable computers each year. It is not possible to sell them all in the domestic market,” Teng was quoted as saying.

Back in Henan, struggling entrepreneur Wang is seeing first-hand how big the gap is between Beijing’s vision and the reality on the ground.

“Can we really rely on domestic consumption to digest most of [the output from] China’s huge production capacity,” he asked. “To be honest, I’m very confused.”

Source – South china morning post

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