Consumption cannot be only driver

Increased investment in high-tech and knowledge-intensive industries also needed to ensure comparative advantage

China's economy is at a crossroads. As 2013 begins, foreign and domestic observers alike are asking which path the country's economic development should take in the next decade. How can China ensure stable and sustainable growth in the face of significant internal and external challenges, including slowing medium- and long-term growth, rising labor costs, and growing inflationary pressures?

After the global economic crisis weakened external demand, which sustained China's unprecedented economic growth for three decades, the authorities agreed that internal demand, especially domestic consumption, must become the country's new growth engine. At the Party's congress in November, Chinese leaders declared their intention to double per capita income by 2020, unleashing 64 trillion yuan ($10.2 trillion) of purchasing power.

Indeed, with roughly 130 million middle-class consumers, the mainland's domestic market holds significant potential. The Boston Consulting Group estimates that, with an average annual GDP growth rate of 7 percent in China and 2 percent in the United States, Chinese domestic consumption will rise to half that of the US by 2015, and 80 percent in 2020 (assuming that the renminbi appreciates at an average rate of 3 percent against the US dollar over the next few years).

Moreover, the current-account surplus plummeted from more than 10 percent of GDP in 2007 to 2.8 percent in 2011, reflecting China's decreasing reliance on exports to drive economic growth. In 2010, China's imports ranked second in the world, and they are expected to grow at an average annual rate of 27 percent in the next few years, outpacing export growth by five percentage points. As a result, the total value of imports is expected to exceed $10 trillion in only two years, providing lucrative investment opportunities and broader markets for foreign investors.

This potential is not lost on multinational companies. A survey conducted in May by the State Council Development Research Center asked 394 Chinese and foreign companies about their future strategic orientation in China. Most of the respondents viewed China not only as a market opportunity, a research-and-development base, and an export base, but also as a high-end manufacturing base, a regional-headquarters site, and a service base. The results also reflected China's declining attractiveness as a base for product assembly, low-cost manufacturing and parts production.

In fact, while the US and other developed countries have been "reshoring", seeking to bring manufacturing home, they have been establishing innovation facilities in China. Multinational companies have created nearly 1,000 R&D centers in China, including 194 in 2010 alone, enabling them to develop products for the local market. More than 1,400 foreign-funded R&D institutions are currently operating in China, and data from China's Ministry of Commerce indicate that 480 of the world's top 500 companies have established local subsidiaries.

But China cannot rely on consumption as its only growth engine. History has shown that a one-dimensional development model cannot ensure sustainable competitiveness, just as no single market can sustain global demand. Given this, China must continue to develop its manufacturing sector.