China has been the engine of Asia’s rapid economic growth. This section summarizes China’s strengths and prospects.

Global Economy and China’s Growth

Due to the global recession, it has been pointed out that world trade has been shrinking in recent years. Looking at changes in the real GDP growth rate of the world, the growth rate was as high as 5% or more from the previous year until 2008, when the global economic crisis occurred. However, the growth of real world GDP has slowed since the economic crisis.

According to the OECD, the world was trapped in a low growth trap for 5 years until 2016. This has led to sluggish investment in emerging markets and stagnant wage growth. Looking at the breakdown of economic growth in countries around the world, we can see that the contribution of the United States is gradually decreasing, while that of China is increasing.

The high degree of contribution means that the trends of the Chinese economy have a great impact on the world. The news that China’s real growth rate from April to June 2019 was 6.2% attracted worldwide attention. The declining growth rate and sluggish car sales can be seen as numerical representations of the global recession.

However, there are examples worldwide where the rate of growth slows as a result of social maturity. Against this backdrop, China is expected to take advantage of industrial structural changes and the new strength of China.

Shift from investment-led to consumption-led economic growth

Investment (fixed capital formation) has supported China’s economic growth. There are two aspects of economic growth: supply and demand. Capital investment in factories and other facilities will increase supply capacity and become a driving force for economic growth. On the other hand, if supply meets demand and the capacity utilization rate of facilities declines, investment declines.

But investment-driven growth can also distort markets. One of them was the real estate bubble in China. In China, the real estate market has been overheated, especially in cities in the east since 2009 after the global economic crisis.

The Chinese government eased its monetary policy with a 4 trillion yuan economic stimulus package. As a result, liquidity increased and speculative funds flowed into the real estate market. China’s financial market is developing and the stock market has a lot of trading restrictions. As a result, investment funds were concentrated in real estate.

The rise in real estate prices was caused by the revitalization of the real estate market as an asset management destination for corporations and wealthy people. While wealthy people buy real estate not only to build homes but also to earn rent income, rising real estate prices have made it impossible for anyone but some wealthy people to buy homes.

Therefore, the government launched a policy to control real estate prices and implemented a tight monetary policy since 2010. Investment-led economic growth has created disparities among the people and has become a major social issue in education and security.

The government is promoting a structural shift to a model of domestic demand-led growth. As urbanization progresses and personal income increases, Japan is shifting from an export-dependent model to a domestic demand-driven model of growth.

The depth of the middle class is China’s strength

The depth of the middle class is China's strength
The era of China’s growth based on its large population is over. In the future, it will be an important issue for many manufacturers to maintain employment as they become more autonomous. As the industrial structure becomes more sophisticated, workers are also required to have advanced technologies and knowledge.

In China, the number of students who want to go to university is increasing, and at the same time, the number of students who want to go to a company after graduating from a vocational school is increasing. The influx of people from rural areas into urban areas and the increase of the middle class are expected to lead to stable consumption by the middle class, who will become affluent in the future.

This can be seen in the number of cars per capita. According to the China Statistical Yearbook, the number of cars in China has been rising steadily since 2010. However, looking at the past trend of car ownership, the percentage in 2017 is 15%, compared with 61% in Japan and 84% in the United States, and it is expected that the number will continue to grow.

Even in Beijing, which has the highest penetration rate, the penetration rate remains at 25%. Although it is the largest automobile market in the world, the fact that it has just under 20% of the market means it has a high potential for future market expansion.

Reference:Trends in the Chinese Automobile Market March 2019
Sumitomo Mitsui Banking Corporation (China) Limited Corporate Research Department

Even in inland areas, where there are many agricultural villages, the number of vehicles owned has grown at a faster rate than in urban areas. In the future, inland areas, like coastal areas, may become affluent and play a leading role in consumption.

Summary

The consumption of the middle class, which is China’s future strength, is also well reflected in online shopping. Major online shopping service Alibaba is also steadily increasing its trade value. Singles’ Day sales reached a record 213.5 billion yuan on November 11, when online shopping became popular in China. This momentum has reached not only China but also Japan and America.

The emergence of such a large market represents a major business opportunity for Japanese companies. If you are going to expand overseas into China, you need to pay attention to China’s economic trends that are sweeping the world.

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