Global Insight: Chinese tap an inner dynamic to drive growth

China is going continental. Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China’s case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world’s fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to “China Continental” – the transition of the world’s most populous country into an increasingly self-propelling economic force. There are caveats, of course, but first the evidence.

Retail sales have held up much better in China this year than in other big economies, growing at a real 15.9 per cent in March year-on-year. But more important than the overall trend is the composition of the retail spending.

The most robust consumer spending figures are coming from inland and lower-tier cities rather than from the traditional growth powerhouses clustered around the Yangtze and Pearl river deltas. A China Confidential survey assessing consumer spending intentions among an estimated 64m middle and upper income households in 189 cities in March showed a much higher propensity to spend in lower-tier cities.

Overall, 51 per cent of respondents in 15 second-tier cities said they planned to increase spending this year from last – a full 9 percentage points more than the number from the first tier. In 170 third-tier cities, 49 per cent of respondents said they would boost their spending this year.

One upshot of this trend is a corporate rush to capture the spending power of the inland consumer. In sectors as diverse as hotels, paid-for education and general retail, companies are seeking to offset slackening sales growth in the big coastal cities by embracing China’s continental geography. A subsidiary of Home Inns and Hotels Management, the budget hotel industry leader which already has a network of more than 600 hotels, aims to open 250 outlets by the end of 2010.

Wal-Mart plans to increase the number of its stores from five to nine in Chongqing, a city 2,500km up the Yangtze river from Shanghai. This will mean it has more stores in Chongqing than in Beijing or Tianjin.

Other signs of the China Continental theme can be seen in the fact that domestically bound cargo traffic through ports is increasing year-on-year, while foreign trade volumes are slumping. Property transactions are surging across the country.

Recent key reforms may also work to create inner-dynamism. A healthcare plan, which envisages spending Rmb850bn ($125bn, €100bn, £85bn) until 2011 on basic health insurance and grassroots clinics, is intended, in part, to expand disposable income. The spreading monetisation of agricultural land, under which farmers have started to use land as collateral for loans or as registered capital for setting up companies, has the potential over time to transform the rural economy.

The unlocking of inner sources of strength will be crucial for China if it is to grow robustly in the face of declining global demand. Foreign trade for the first quarter fell 24.9 per cent year-on-year, but overall gross domestic product grew by 6.1 per cent during the same period.

Some of this growth has come from the initial implementation of a Rmb4,000bn fiscal stimulus package, but the bulk of planned infrastructure spending has yet to get under way.

Sceptics argue that China’s performance this year has come through huge but ultimately unsustainable government intervention. Such spending, they say, will boost growth for a time but achieve little but industrial overcapacity in the longer run. These arguments are not without merit, but they miss a newer, more interesting prospect; that Chinese growth is increasingly self-generating and continentally driven.

James Kynge is editor of www.ftchinaconfidential.com.