Doug Guthrie is a professor of International Business at The George Washington University.
Transcript

The majority of media outlets claim that China's current economic model is running out of steam, and the nation should move away from the current investment-driven model to a new one that relies on domestic consumption.

In our previous episode, I asked J.P. Morgan managing director Jing Ulrich about whether consumption could really become a key driver of China's long-term economic growth. Ulrich's answer is yes.

However, Doug Guthrie, professor of International Business at The George Washington University and a Western expert in China's economic reform, believes that in order to make the successful transition to a consumption-led economy, China has some challenges to overcome.

Q: As you know, China is transforming from a development model that relies heavily on export to a new one that encourages domestic consumption, a trend some believe would create new opportunities for foreign businesses. So, what's your vision on China's future as an emerging market and a consumer market?

A: So, the first thing is, as you point out, it's very clear that China knows and the rest of the world knows that China must make the transition from its current economic status to being a consumer-based economy.

Now, one of the big problems for China is that, in order to make the shift from an economy based on state-led infrastructure investment to consumption-based development, China needs to see a swing in the pendulum away from the drivers being investment to consumption.

If you read the work of the economist Dwight Perkins, Perkins thinks that this is still about five to six years away because China's per capita GDP is still around $6000 to $7000, and it's until a country gets to about $13,000, you can still make a lot of money for the economy by being a state-led, investment-driven economy. The problem is when labor cost becomes high, you have to really develop a consumption-based economy.

Chinese people are culturally very good savers. So, it's actually interesting because if you are an economist that is just trying to construct an economy, you want a smart economy, you want people who think in healthy ways about saving and investment. And so, Chinese people actually have maybe No.2 or No.3 savings rate in the world, which is great, but the problem is that people hold on to their money.

So, for an economist or politicians who want to drive a consumption-based economy, you need to see people starting to invest, or not invest just start to spend money.

Now, the truth is that, Chinese people save money for a very good reason. They save it primarily for healthcare and education; healthcare we have to see a big development in that industry; and education we need to see that development too, and we need to see Chinese people spend their money in China and not in places like the United States, Canada and Britain.

So, I think there're a lot of things that need to happen for the development of this consumer-based economy. But, I think that China's position is still pretty healthy in this market.