If youve got it spend it unleashing the chinese consumer

If you've got it, spend it: Unleashing the Chinese consumer

By Jonathan Woetzel, Janamitra Devan, Richard Dobbs, Adam Eichner, Stefano Negri, Micah Rowland
If you've got it, spend it: Unleashing the Chinese consumer

By pursuing a more aggressive program of comprehensive reform, China's leaders could raise private consumption above 50 percent of GDP by 2025, vaulting China's economy into a new phase.

As the global financial crisis ebbs, China's leaders realize more clearly than ever that they must unleash consumer spending to achieve sustainable growth. Stoking Chinese consumption has vaulted to the top of national—indeed global—policy agendas. China has already embarked on measures that will shift the focus of its economy away from heavy industry and exports and toward services and consumer products. But if China's leaders committed themselves to a more aggressive program of comprehensive reform, they could raise private consumption above 50 percent of GDP by 2025. Clearing that threshold would bring the consumption rate in line with its peers in Asia today, vaulting China's economy into a new phase.

MGI finds that a comprehensive program of reform would also enrich the global economy with $1.9 trillion a year in net new consumption, boosting China's share of the worldwide total to 13 percent—4 percentage points higher than its share without further effort.

With private consumption at $890 billion in 2007, China is the world's fifth-largest consumer market, behind the United States, Japan, the United Kingdom, and Germany (which China recently surpassed as the world's third-largest economy). But relative to China's population and level of economic development, its consumers punch far below their weight. The country's consumption-to-GDP ratio—36 percent—is only half that of the United States and about two-thirds those of Europe and Japan.

In fact, China's consumption-to-GDP ratio has dropped by nearly 15 percentage points since 1990 and continues to deteriorate in the aftermath of the financial crisis. The sources of China's low consumption rate are both behavioral and structural. The country's households have an extraordinarily high ability to save: the average Chinese family saves 25 percent of its discretionary income, about six times the savings rate for US households and three times the rate for Japan's. Indeed, China's savings rate is 15 percentage points above the GDP-weighted average for Asia as a region.

Structural features also suppress consumption as a share of the national income: Chinese households command only some 56 percent of national income, compared with more than 60 percent in Europe and more than 70 percent in the United States. And Chinese household's share of national income has fallen over the last decade.

Perhaps the most common explanation for the Chinese consumer's reluctance to spend more freely is the frayed social safety net. Over the long run, mending the social safety net would ease anxieties about the future and bolster consumer confidence. Yet MGI finds that better health and pension guarantees would not raise private consumption significantly before 2025. Measures to make goods and services better and more easily available could do more to encourage consumption.

To assess how, and how much, China can boost consumption, MGI considered three scenarios for Chinese consumption rates over the next 15 years: a base case (no new action to raise consumption), a policy case (full implementation of measures to boost consumption already announced), and a stretch case (a push beyond the current agenda to implement broad changes in the economy's structure).

To achieve the stretch scenario, China's leaders will have to wage a sustained policy struggle on many fronts, combining relatively straightforward measures to encourage private spending with fundamental reform of the nation's health and pension systems and sweeping changes in the economy's basic structure. Over the next 15 years, China can realistically hope to increase private consumption's share of total output significantly—but only if policy makers abandon the current development paradigm and embrace new policies, structures, and institutions better suited to the country's status as a large, maturing market economy.

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