After several years during which wages have grown more slowly than the economy, consumption accounted for barely a third of overall Chinese demand in 2007. But there are a couple of reasons to think it will play a much bigger role in the next couple of years. The first is that household spending still seems to be growing rapidly, despite the negative impact of inflation on real incomes. As a result, consumption actually contributed more to GDP growth in 2007 than investment – the first time that has happened since the investment boom that followed China’s WTO entry. The second is that, as the renminbi gains in value, China’s government will have an opportunity to tackle distortions (principally the low cost of capital) which have encouraged over-investment in heavy industry. A surge in labour-intensive, income-supporting activity should follow.
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