Effort to build a nation of consumers meets resistance from budget-minded shoppers

Leaders' efforts to transform mainland from factory to shopping mall is meeting resistance

PUBLISHED : Monday, 03 February, 2014, 4:01am
UPDATED : Monday, 03 February, 2014, 4:01am


Business should be picking up for Zhao Guoping, a Beijing shopkeeper, as central government leaders try to build a consumer society to replace a worn-out economic model based on trade and investment. But his financial struggle highlights the hurdles that ambitious effort faces.

Squeezed by higher costs and weak sales to budget-minded shoppers, Zhao said the income from his neighbourhood shop had fallen by half, to 50,000 yuan (HK$64,000) a year.

"Prices are rocketing. People's incomes can hardly catch up," said Zhao, 38. "Daily necessities, yes, I still have to buy them. But anything I don't necessarily need, then no."

The reluctance of Zhao and his customers to open their wallets wider is one of a thicket of obstacles facing leaders as they try to rebalance China's economy away from reliance on investment, much of which comes from the government and is losing its ability to boost growth.

The government is walking a fine line, however, as an abrupt shift in the economy could hurt growth, with consequences not just for the country but the global economy. China's economic importance was laid bare last month when a report showing a drop in manufacturing caused turmoil on world markets.

Combined with an export boom, a flood of spending on new factories, highways and other assets powered the past decade of explosive growth. That helped China rebound quickly from the 2008 global crisis. But it was paid for with a surge in borrowing that economists warn looks like debt booms in other developing countries that spiralled into financial crises.

As urgency for change mounts, so do potential hurdles. Consumer spending accounts for only about 35 per cent of gross domestic product, well below neighbouring India's 60 per cent, and that percentage declined last year. Curbs on investment will mean less money flows to wages in construction and building materials industries such as steel and cement.

"It is a pretty narrow path that policymakers have to push the economy along," said Mark Williams, chief Asia economist for Capital Economics. "The risk is that if investment spending slows too much, then that starts to undermine consumer spending and you get a downward spiral."

Moves to encourage consumer spending are part of efforts by the Communist Party to transform China from a low-wage factory into a high-income creator of technology with self-sustaining economic growth.

Regulators announced last month that they would allow the creation of five privately financed banks this year. The government has announced plans for a dozen new free-trade zones in Shanghai and other cities with promises of easing restrictions on business.

But such changes will take time to show results.