EXECUTIVE SUMMARY
There is recognition at the highest political level in China that the economic paradigm that has served the People’s Republic so well thus far is no longer fit-forpurpose.

China’s investment-led model has skewed the economy toward industry and has made corporate investment too cheap, leading to inefficient investment in excess capacity. Reliance on exports has left China exposed to a downturn in its major markets. As the global fallout of the US financial crisis has put new strain on China’s current development model, the case for shifting toward a stronger reliance on domestic consumer spending has gathered force.

In March 2007, Chinese Premier Wen Jiabao surprised outside experts at an important annual planning forum by confessing that he feared China’s economy suffered from “structural problems” resulting in development that was “unsteady, unbalanced, uncoordinated, and unstable.” Indeed, Premier Wen and the rest of China’s senior economic leadership recently made the promotion of domestic consumption a critical pillar in the drive to sustain economic growth in the long term—a strategic shift that has potentially profound consequences not only for China but also for the global economy.

In view of this new priority, the McKinsey Global Institute (MGI) undertook to build an understanding of the drivers behind China’s low consumption share and to identify potential policy initiatives that could contribute to a rebalancing of China’s growth model over the next 15 years.

In tandem with a large short-term stimulus package to help the economy weather the current economic crisis, China’s government has already embarked on many aspects of this shift, including reforms to health care, education, and the pension system. This report seeks to quantify how this range of other initiatives could, if fully enacted, affect today’s low consumption share of GDP.

CHINA CAN BOOST CONSUMPTION SHARE OF GDP TO 50 PERCENT BY 2025
The research demonstrates that it is possible to boost China’s consumption share of GDP from 36 percent in 2005 to 45 to 50 percent by 2025, 6 to 11 percentage points above trendline projections of 39 percent (Exhibit E1). ...

Download If You’ve Got It, Spend It: Unleashing the Chinese Consumer

PDF format, 841KB, 74Pages.

McKinsey Global Institute
August 2009
Designed by New Media Australia
Copyright © McKinsey & Company
www.mckinsey.com/mgi

CONTENTS
Executive summary 8
1. China underconsumes for its level of wealth 16
2. Why China underconsumes 22
3. Boosting consumption: A three-pronged agenda 31
4. Conclusions 52
Technical appendix 54
Bibliography 71

PREFACE
China is on course to become the world’s third-largest consumer market by 2020. Nevertheless, private consumption constitutes a remarkably low share of China’s economy, whose rapid growth in recent years has come on the back of a development model that has rested heavily on industrial investment and exports.

Even before the global financial crisis buffeted China and proved its vulnerability to a downturn in its key export markets, the political leadership of the People’s Republic had set itself a new aim of rebalancing its economic mix and boosting the consumption share of the economy. If China succeeds in this aim, it would not only boost GDP, jobs, and incomes, but it would also insulate itself from volatility imported from overseas.

As a contribution to the policy debate on China’s evolving economic model, the McKinsey Global Institute (MGI) and McKinsey & Company’s China practice have analyzed the most important policy levers that could propel China toward the goal of a higher share of consumption in China’s economy. ...

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