Expert says Chinese consumption will grow

With advantages in traditional global exports and manufacturing, China is transitioning to innovation-driven advanced manufacturing, and domestic consumption will gradually become the driving force for the country's economic growth, said Joe Ngai, senior partner and chairman of McKinsey & Co Greater China office.

With geopolitical tensions and trade disputes, coupled with rising labor and production costs in China, as well as supply chain disruptions arising from the COVID-19 pandemic and the conflict in Ukraine, global enterprises in the last few years have been maintaining operations in China while expanding production to at least one other country to reduce risks and costs, as well as to diversify their markets.

"In the last couple of years, although there are more trade barriers, China has exported more than ever before. The trade linkages between China and the rest of the world have grown even faster," Ngai told China Daily in an interview.

Ngai is confident that while China moves up the value chain ladder toward high-tech manufacturing, the country can still maintain competitiveness on the low-tech side.

"The scale of the Chinese market makes domestic manufacturing still competitive. That scale has enabled it to drive the prices and supply chain costs with more economies of scale even on the low-tech side," Ngai told China Daily.

China is in some ways an innovation-driven economy, and innovation has been applied to the actual manufacturing process, driving the way toward advanced manufacturing.

"China is progressing from labor-intensive manufacturing into high-tech manufacturing. There are many parts of the economy that need capital investment and capacity and therefore have pretty good opportunities," Ngai said.

"We are exporting not only hard goods, but also our methodologies and processes. The next phase of China growth is not exporting finished goods, but exporting ideas, intellectual property, and engineering capacity," he added.

Ngai said that multinationals in the past introduced many of their technologies and much of their know-how to China. "Now we may be seeing China bring its many technologies and knowhow to other countries. As the next phase begins in the industrialization of other countries, I think China can play a very big role in helping that industrialization."

The traditional export sector remains resilient and the country is transitioning toward advanced manufacturing. Ngai therefore does not believe China has to change completely from a manufacturing economy into a pure consumption economy, even though consumption will be a force in Chinese economic growth.

"Chinese consumers will spend as they have plenty of savings and personal debt in China is actually quite low," Ngai said. "In the last couple of years, there has been a slight confidence issue because of plunging real estate prices, but as the market stabilizes, Chinese consumption will continue to grow."

He added that the contribution of the consumption segment to the country's gross domestic product will grow, but it will take time to gauge how fast the segment will expand.

Ngai said that Chinese consumer sentiment is recovering, but consumers are now more selective, sophisticated, experimental, and willing to try new things and look for value.

In recent years, the Chinese economy has been embroiled in an involution characterized by excessive and race-to-the-bottom competition with aggressive price cuts and thin profit margins, which has occurred across a wide range of sectors. Cut-throat competition is also associated with overcapacity, excessive supply, and low capacity utilization.

At the microeconomic level, excessive price competition can be very frustrating for a company, as prices keep dropping and there may also be oversupply issues. But from a macroeconomic perspective, competition induces a lot of innovation and new thinking.

"If I have to lower my cost by 30 percent, I need to think of my product in a very different way. Involution drives a lot of innovation and competitiveness for Chinese companies today. It has created companies that have become very competitive world-class players," Ngai said.

oswald@chinadailyhk.com