China's new leader must boost domestic consumption
08 November 2012
Emerging economies expert Kamel Mellahi says China's new leader Xi Jinping has to concentrate on expanding domestic consumption if the world's biggest country is to carry on the kind of growth it has become accustomed to.
China is this week handing over power from outgoing president Hu Jintao to Xi Jinping as the world's second largest economy shows signs of slowing down.
Mellahi told BBC Radio Scotland that if China is to return to anywhere near the double-digit growth it has experienced over the last decade it has to shift its strategy from predominately export-led growth to domestic consumption and that means increasing the buying power of its rising urban middle class, rural migrants, and relatively poor rural population.
That could cause more political problems for Jinping as China tries to spend its way out of the slowdown.
China could try to devalue its currency to boost its export economy, but Mellahi says the export-led boom China has experienced is now impossible to sustain given the economic crisis in the West.
Warwick Business School Professor Mellahi said: "China's economic growth has slowed down and we are not going to see the double digit figures as we saw before.
"The only way forward for China to continue to grow is to boost local consumption given the slowdown in exports. We are seeing a push from the Chinese Government to double household income in the next few years and that is the way to do it given the decline in exports. The economic crisis in the west means China can't rely on exports any more.
"It is going to be the domestic economy that drives China now. We have seen exports have slowed, but the production capacity has to be sustained and to do that it has to come from local consumption."
And Mellahi, who is Professor of Strategic Management and Head of Strategy and International Business Group at Warwick Business School, which is part of the University of Warwick, believes boosting domestic consumption will see China lose the advantage of cheap labour over the rest of the world and could see it suck in more imports in the future.
"It is not going to be painless for China," said Mellahi. "By boosting local consumption you are going to increase household income and disposable income so they can spend more and that means in terms of competition that the products of China will be more expensive. Therefore that will bring in more imports, though I don't think that is going to have a big impact on the world economy.
"The double digit growth we have seen has been thanks in the main to exports, but we know the workforce has subsidised these exports. This is slowly disappearing and we are going to see a significant rise in the cost of labour, which will again impact on exports."