China’s rapid economic growth into an industrial production powerhouse is well-documented but recent developments suggest this trend could be reversing. Known as the world’s largest production/expenditure economy, China is slowly transitioning into an economy centered on consumption and service. Growth in China’s industrial sector has slowed from 7.3% to 6.0% over the past 3 years as services grew at a rate of 8.3% in 2016 compared to 7.8% the year before. In addition, consumer spending increased by 9.6% in 2016. This increase can largely be attributed to a 26.% rise in online retail sales which is quickly becoming a staple of the Chinese economy. The development of China as a consumer/service economy in recent years mirrors the slowing of overall economic growth. In 2016 China’s economy grew by 6.7% percent down slightly from 6.9% in 2015 and more significantly from 7.3% in 2014. What is the relationship between China’s service/consumer growth and the slowing of overall economic growth?
The Chinese government paints the increase in consumption and the service sector of the economy as a successful policy pivot. President Xi Jinping touts the growth of consumer spending as a result of his plan to double citizens income between 2010 and 2020. However, many independent analysts see the rise of consumption and the service sector as more reflective of a weakening industrial sector rather than a successful policy pivot to service sector growth. This is why many see the increase the proportion of service as a part of GDP, up to 64.7% last year, as merely compensating for a lagging Chinese industrial sector. Slowing markets and lack of fiscal support for new industrial projects, especially in construction, have contributed to the relative decrease in Chinese industrial power.
It remains to be seen whether this trend of slowing industrial growth in China will continue into the future. Despite growing at lower rates than the previous two years, Chinese manufacturing still grew throughout 2016 and even outperformed projections of slower growth. The same factors that allowed China to grow into a powerful production economy (massive population, low barriers of entry) could certainly continue to sustain China as an industrial power. However, the data suggests that consumption and services will continue to grow relative to production over the next few years and possibly even further into the future. How Chinese policymakers handle the transition to a service/consumption economy will be interesting to observe over the next few years.