MNI INTERVIEW 2: China Domestic Demand Key For China-US Race

China faces a more urgent need than ever to expand domestic demand, which is necessary to rebalance both the Chinese and world economies and could provide an opportunity to displace the U.S. as the world’s leading consumption market if it is accompanied by further economic opening, a prominent economist told MNI in an interview.

The current Sino-U.S. dispute over trade, as the U.S. pursues re-industrialisation, will see a global recalibration of savings and investment, said Cao Yuanzheng, former chief economist of the Bank of China. China has few alternatives but to prioritise domestic demand, Cao said. 

Chinese exports already account for over 14% of global exports, leaving little room for further growth, he noted.

The potential for domestic consumption is substantial, he said, with the number of middle-class citizens expected to double by 2035 from 400 million today, taking the country’s consumer market past the U.S. in size and becoming the world’s largest sustainable growth market. (See MNI INTERVIEW:Global Rebalancing Has No Easy Solution - Pettis)

 If this growth is accompanied by an enhancement of China’s global governance capabilities and a unilateral opening to the world economy, it could position China as a global leader, said Cao, pointing to zero-tariff agreements with ASEAN, and duty-free access for ASEAN-made agricultural products as an example. These strategic moves underscored Beijing’s commitment to reshaping global trade norms while anchoring its domestic transformation, he noted. 

MIGRANT WORKERS

China’s urbanisation rate stands at around 66% in 2023, but only 48% of the population holds urban household registrations, and the disparity severely constrains the consumption capacity of 290 million migrant workers, as they allocate substantial income to construct homes on rural homesteads, forming fixed assets without generating property income, he noted. (See MNI INTERVIEW: China To Boost Stimulus In U.S. Tariff Response)

Granting urban residency status to migrant workers has become pivotal for China’s economy, Cao said, pointing to how the Third Plenary Session of the 20th CPC Central Committee in July 2024 had specifically prioritised urban-rural integration, with equal access to public services such as housing, education and healthcare.

Authorities will deepen reform of China’s social security system, integrating more state-owned assets into the social security fund, which should boost confidence and spending, the economist said. 

China started taking measures to boost consumption and to reduce its reliance on exports in 2010, helping to lower its trade surplus from 10% of GDP in 2007 to under 1% by 2018. Its domestic market doubled in size from 2010–2020, Cao said, noting that, despite a temporary rebound during the pandemic, China’s current account surplus has remained below 2% of GDP.

In contrast, the U.S. has struggled to curb its deficits, which he called an inherent feature of its role as the issuer of the dominant global currency. Once China’s top export destination, the U.S. now ranks third, as exports to ASEAN, Africa, Latin America, and Belt and Road countries have grown rapidly, he noted.