According to Feng Lu, an economics professor at Peking University’s National School of Development, volatile housing markets, income inequality and environmental degradation are among the biggest challenges to China’s economic growth in coming years.
“We are facing a lot of problems and challenges,” Feng said. “Challenges in the delays of a crucial reform agenda, a widening income gap and the worsening situation with the environment and pollution.”
Feng said perhaps the biggest challenge the government faces is land reform. In recent months, property prices have been chaotic in China, with values skyrocketing in some cities and falling dramatically in others. This is because of local government monopoly on the supply of land that is usable for urban development. At times, he said, the available supply is tightened, resulting in housing bubbles.
“To reform the system, you need to reform the land regime,” Feng said. “If you cannot get rid of that problem, I think the prospect of China’s economic growth in the future will be very gloomy. It is not easy to do that.”
Income inequality “is still a problem,” he said. “We talk about fashion goods. We talk about luxury goods, but we need to support it with income growth. If social tensions are too big, that is not good for the poor or the rich as well as for fashion and market growth.”
Yet, Feng is optimistic about consumption, advocating for reform in the sales of luxury goods, such as lowering tariffs, which he said would result in the domestic sale of luxury products to be “substantially higher than the growth of national consumption.”
Feng also said that if trade barriers were reduced for luxury products, up to 400,000 new jobs could be generated in the sector in China. Consumption of luxury goods globally by Chinese has increased from around 2 percent to 22 percent over the last 15 years, Feng said, adding that domestic sales of luxury goods has only made up about a third of national consumption by the Chinese.
He estimates that within a decade, annual sales of luxury goods in China could be up to one trillion yuan, or $147.8 billion. Also within a decade, Feng said he estimates that if reforms are successful, more than 500 million Chinese will have a per capita income of $30,000.
Fashion has “higher income elasticity,” he said. “Usually the growth of the consumption of luxury goods will be higher than income growth.
“In my observation, if reforms were implemented to reduce transaction costs in the [luxury] sector, the trade barriers, I think the expansion of domestic sales would be substantially higher than the growth of national consumption,” Feng said.