Beijing has for years insisted that the key to sustainable economic development lies in moving away from investment-led growth toward consumption. So far, however, the government’s efforts to boost consumption have had little effect.
Despite rising spending among consumers, a recent report by Citigroup economists Shen Minggao and Ken Peng notes that the overall ratio of household consumption to GDP has declined from more than 50% in the 1980s to about 35% this year. The urban consumption to GDP ratio, which peaked at 31.1% in 2000, has also fallen. Shen and Peng point to a number of factors, including the loss of a social safety net in the 1990s, the growth of exports and investment, and disproportionately low benefits for consumers from economic growth.
Consequently, developing areas with income levels that still aren’t particularly high find themselves dependent on investment to boost their economies. "Only after reaching a certain level of income do households start to increase demand more than the overall economy consistently," Shen and Peng wrote.
Wanzhou, located within Chongqing municipality, is a good example of an area in the investment-driven stage of development. Formerly a separate prefecture-level city, Wanzhou’s industrial base was weakened in the 1990s by privatization and consolidation of industries. The construction of the Three Gorges Dam, which submerged much of the old city, also had a negative economic impact and led to high unemployment, said Zhou Wenxing, a professor of the College of Economics and Business Administration at Chongqing University.
Today, the city retains a number of light industries, including Shixian Taibai, a local brand of spirits, but unemployment remains a problem. Wanzhou’s 2008 annual report put urban unemployment at 8.83%, though this was an improvement over 9.94% unemployment recorded in 2007.
State spending has kept the city growing: Local government investment, favorable policies by the Chongqing municipal government to attract investment, and central government support have all played a role, Zhou said.
Wanzhou has benefited particularly from its selection by the Chongqing government as the municipality’s second city. New infrastructure, including government buildings, housing, roads and bridges attests to authorities’ plans to grow the city physically as well as economically. Zhou believes this investment will have a positive effect on the city’s consumption levels.
"People around Wanzhou will take Wanzhou as their first choice for shopping, rather than going to Chongqing," he said.