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Economic Report

Economic reports, briefs issued by Samsung Economic Research Institute

Young Consumers Drive China's New Economic Model

Young Consumers Drive China's New Economic Model

YOO Jin-Seok

Aug. 5, 2013

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China is transforming from "world factory" to "consumption powerhouse." Since the launch of its 12th Five-year Plan (2011-2015), the country has been shifting from export/investment-led expansion to growth driven by consumer spending. The aim is to balance the economy.

This policy paradigm shift comes as China's top leaders acknowledge that continued reliance on state and corporate investment and exports is no longer conducive to stable growth. Overcapacity and over-development already is widespread and wage inflation is ending global manufacturers' attraction to China for parts assembly and export. The contribution of investments to GDP growth fell to 50.4% last year from 52.9% in 2010. Net exports' contribution dropped to -2.2% in 2012 from 4% in 2010.

The shift is well under way. Domestic consumption has grown at an annual average rate of 14-15% during the past five years. As a result, consumption's contribution to growth reached 51.8% in 2012, up from 43.1% in 2010.

The government's determination to expand domestic demand and stepped-up urbanization drive by China's new leaders are set to stimulate further gains in private spending. A 1% increase in the urbanization ratio lifts consumption by an estimated 1.6 percentage points. That translates into additional 100 billion-130 billion yuan (US$16 billion-20 billion) of consumption pumped into the economy annually. By 2015, China may likely see its consumption reach US$6.1 trillion, surpassing Japan as the world's second-largest consumer after the US.

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