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One quote from Jack Ma sums up a huge shift in China’s economy

Krystal Hu
Jack Ma, Founder and Executive Chairman of Alibaba Group Holding, addresses the media during the inaugural Gateway ’17 event at Cobo Center in Detroit, Michigan, U.S., June 20, 2017. REUTERS/Rebecca Cook

“China is shifting from exporting to importing,” Alibaba CEO Jack Ma said in Detroit on Wednesday. “China is going to to be the world’s largest consumption place and that engine is going to drive the world economy.”

Ma said this during Gateway ’17, the e-commerce giant’s biggest public event in the US, where he addressed 3,000 small business owners and urged them not only to import from China, but also to sell to China.

Back in January, Ma even told President Donald Trump that within five years Alibaba could create 1 million US jobs for small businesses that sell goods to Chinese consumers.

While that’s a lofty goal, the undergoing transformation in the world’s second largest economy is real: consumption has become China’s growth engine.

From made in China to sold in China

China has historically been known as a factory for the world that manufactures and exports low value-goods. During his campaign for president, Donald Trump seized on this reputation to attack China for supposedly stealing US manufacturing jobs that he promised to bring back.

But China has lost manufacturing jobs, too. Just as US companies have moved jobs to cheaper locales, Chinese manufacturers have relocated factories to Southeast Asia to take advantage of cheaper labor and land.

One Chinese company, Weihong Footwear Industrial, a supplier for Nike and Adidas, first established a factory in Vietnam in 2013, and now plans to move several more factories there, the Wall Street Journal reported last year. Meanwhile, Stella International, which makes shoes for Michael Kors, shuttered a Chinese factory last year and sent production to Indonesia and Vietnam, The New York Times reported.

The loss of manufacturing jobs marks a profound change in China, since manufacturing has driven the country’s economic growth for the last 20 years. To deal with the change, the Chinese government has been intentionally cultivating its domestic demand to reduce reliance on investment and exports.

Since 2014, consumption has become the main driver of China’s economic growth. Last year, consumption contributed 64.6% to China’s GDP growth, up from 50% in 2013. Exports dragged the growth down by 6.8%, according to National Bureau of Statistics. A report from Boston Consulting points out the incremental growth in China’s consumption over the next five years will roughly equal a market 1.3 times larger than that of today’s Germany.

China’s spike in consumption and slowing manufacturing means the country needs more products from overseas. In fact, the government expects to import goods worth $8 trillion US dollars by 2020, China’s Ministry of Commerce said in May.  “It will bring immense business opportunities for companies in the United States to further balance bilateral trade,” the Ministry of Commerce report stated.

China plans to bring more US agricultural products like soybeans and cotton and advanced manufactured items such as passenger aircraft and machine tools, according to the report.

Growing number of middle-class consumers

The growing middle-class in China is driving this shift to consumption. These consumers may be the Chinese tourists in New York City who line up on the doorway of luxury brands on Fifth Avenue, or millennials trying to find bargains on Alibaba’s marketplace using their smartphones.

The domestic demand in China still has much potential to grow, as only 11% of China’s population can be considered middle-class now, according to a report by Goldman Sachs. Less than 2% of workers make enough money to pay income tax. Only 4% of Chinese people hold a passport and travel outside the country, far lower than 35% for the US.

However, the Economist Intelligence Unit expects the upper middle-income group ($10,800-$32,100) in China to expand to 19.7% by 2030. And high-income individuals (above $32,100), will account for 14.5% of the population in 2030, up from 2.6% 2015.

Ma wants American producers and manufacturers to target this growing group of middle-class Chinese consumers, who contributed $17.8 billion worth of gross merchandise volume (GMV) during last year’s Single’s Day, a Chinese version of Cyber Monday launched by Alibaba.

“In the next 10 to 15 years, China is going to have 500 to 600 million middle class. The demanding for high-quality and high-service products is huge,” Ma said in the speech. He told a story about how cherries from Washington State became a hit in China and finished the hour-long speech with a request: “Please do business with China.”

More from Krystal Hu:

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Alibaba wants to be more than the Amazon of China

How Amazon is eclipsing Walmart’s best efforts to dominate e-commerce