Considering the increasing weight of consumption in China’s gross domestic product, new types of retail such as cashier-free stores have great room for future growth.

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From the perspective of the hierarchy of needs theory and the pattern of economic development, consumption tends to move to a higher level after lower-level needs are met. In the beginning, consumption is to meet basic survival needs, but as the economy grows and incomes increase, people focus more on the quality and value of life, thus spawning development-oriented consumption and spending on items related to personal pleasure. Under such circumstances, consumption industry expands to include various sectors like education, entertainment, tourism, low-carbon lifestyle and other aspects.

Over the past 40 years since the reform and opening up, the proportion of subsistence consumption in China’s total consumer spending has been declining. Among urban and rural residents, the Engel coefficient, the proportion of income spent on food, respectively dropped from 57.5 percent and 67.7 percent in 1978 to 28.6 percent and 31.2 percent in 2017. In the same period, consumption for the purpose of personal development and enjoyment has risen. In 1981, spending on transportation, communication, education, cultural entertainment, healthcare and other services accounted for 10.79 percent of urban and 7.80 percent of rural consumer spending, but by 2017, the figure had climbed to 37.06 percent and 34.75 percent, respectively. It is evident that the consumption structure has been upgraded.

In fact, from 2000 to 2017, China’s per capita spending in urban areas grew by an average of 38.3 percent annually in transportation and communication, 17.6 percent in healthcare, 15.2 percent in cultural and educational spending and 11.8 percent in living expenses. The growth rate of service consumption is by all means significantly faster than that of material goods.

 

Surging service consumption
In the new era, Chinese people are displaying new consumption patterns, so it is necessary to adjust policies in a timely manner to upgrade the consumption structure in accordance with the trend and direction of structural changes. Service consumption is an important aspect of development-oriented and pleasure consumption. Since the mid-1990s, there has been a rapid growth in demand for services in China’s urban and rural areas, with tourism, transportation, communications, healthcare, education and cultural entertainment serving as the new consumption hotspots, which in turn drives the upgrade of consumption structure.

However, since 2005, the growth rate of service consumption has slowed, and the upgrading of consumption structure has encountered a bottleneck. In addition to the lingering household income growth, high housing prices is another force inhibiting residents’ spending on tourism, transportation, communication, education and cultural entertainment, healthcare and other services. Therefore, ensuring that houses are built to be occupied instead of speculation will effectively promote the further upgrading of China’s consumption structure.

To meet the demand for services, a well-developed service industry is needed. At the same time, the rapid development of the service industry provides employment, increasing incomes and consumption capacity, which has become vital to upgrading the consumption and industrial structure.

At present, socialism with Chinese characteristics has entered a new era. China’s economy has headed toward high-quality growth. According to data from the China Statistical Yearbook, the proportion of China’s service industry in GDP increased from 40.5 percent to 43.1 percent in 2001 to 2010. However, since the 12th Five-Year plan, the relative contribution of China’s tertiary industry has gone up significantly, with the service sector accounting for 51.6 percent of GDP by 2017. In the developed countries, service industry often accounts for more than 70 percent of GDP, so China’s service industry still has plenty of room for development.

In recent years, the government has implemented a series of policies to promote the service industry, including relaxed admittance for finance, insurance, securities, telecommunications and other service enterprises, accelerated reform of state-owned enterprises in the service sector, strengthened financial policy support for services, and further opening the service industry to the outside world.

Urbanization is another important factor that encourages the transformation of a country from an agricultural economy to a service economy. Judging from international experience, countries or regions with developed service industries have high urbanization rates. In this light, China’s future urbanization effort will also drive the rapid development of service industry, its share in the national economy and service consumption, as well as the consumption structure upgrade.

 

Supply-side structural reform
It is a known fact that China’s economy has developed rapidly over the years, the income level of its residents has been rising and its consumption capacity has been increasing. However, with the advent of the internet era, the residents’ consumption demand shows many new changes, from the past’s imitation consumption behavior to a personalized and diversified spending pattern based on experience. People have shown growing interest in state-of-the-art products, and new trends in consumption are surfacing.

Against this backdrop, China’s supply-side constraints on domestic consumption are becoming more apparent. In recent years, there have emerged a large number of outflow phenomena in the sector, as the scale of Chinese outbound tourism rises sharply and Chinese tourists flock to buy luxury and high-end brands abroad. As an extreme example, Chinese people have made headlines by lining up to purchase Japanese toilet seat covers and rice-cookers.

The problem reveals two underlining issues. First, supply structure cannot adapt to the consumption structure upgrade. Second, low-end invalid resource-intensive production capacity cannot exit. The root lies in the lack of effective supply and innovation capacity resulted in the extensive growth mode. To say the least, the equilibrium of supply and demand is imbalanced.

Though the government has been pushing to stimulate demand in recent decades, the structural imbalance cannot be resolved through a linear approach. Therefore, it is urgent to rethink and re-design on the supply side, deepen supply-side structural reform, effectively resolve the contradiction between the current imbalance of supply and demand structure, through leading institutional, technological and product innovation to meet the residents’ thirst for a variety of services and merchandise.

For domestic products and services that are in short supply, it is necessary to improve the efficiency of innovation and reduce R&D costs. More importantly, it is essential to establish an industry development mechanism focused on consumer demand. Emerging consumption should meet the practical needs of consumers and build on potential demand. Also, it is the key to building brands, valuing consumer experience, and actively coming up with the future products.

At the same time, we will accelerate the development of high-end consumer goods industries and gradually develop domestic incubators for the industry, through policy guidance and incentives for technological innovation, thus encouraging overseas consumption to return home.

For the low-end, invalid supply driven by high investment, backward production capacity should be eliminated while the transformation of traditional industries must be accelerated. In the process, the decisive role of the market in allocating resources needs to be realized while the market mechanism should be employed to eliminate surplus production capacity, adjust and optimize the product structure, and stimulate the innovative potential of enterprises.

When the market presents new products, technologies and services, the government needs to strengthen the protection of intellectual property rights, improve the competition mechanism, create a fair innovation environment, and let the market choose the winners of innovation in the competition of survival of the fittest.

Going forward, Chinese consumers will pay more attention to brand and quality of consumption, which will be the leading direction of the consumption structure upgrade. In addition, the number of middle-income people in China will increase from 230 million to 630 million in the next 20 years, making them a major force in upgrading the consumption structure.

The acceleration of rural revitalization and new urbanization will  promote the upgrading of the rural consumption structure. At the same time, an aging population, coupled with the two-child policy will greatly affect China’s consumption structure upgrade .

In this regard, the government has made heavy-handed approach to shift toward a low-carbon, green and environmentally friendly consumption. Mobile internet, big data, cloud computing and artificial intelligence, will also give rise to a number of new consumption growth, affect the traditional consumption and lead to an upgrade in traditional consumption.

All in all, China’s consumption structure upgrade is still at its infancy. The government must implement targeted policies to release institutional incentives, form a high-quality development path for consumption structure upgrade, industrial optimization and innovation, and meet people’s growing needs for a better life.

 

Wang Wei is a professor from the School of Public Economics and Administration at Shanghai University of Finance and Economics.

(edited by YANG XUE)