An interesting article in the Washington Post entitled “Can China Lead a Recovery? explores the ability and probability that China’s consumers will be an engine for growth out of the global recession. In the pact American consumers have consistently been the dynamic force that has spurred global trade and growth. About two thirds of US GDP has been accounted for by consumers compared to just 36% in China. But with a growing middle class and massive financial incentives being thrown at them by the Chinese government, the Post explores how likely they are to step up to the challenge.
Even though China has the world’s third largest economy and the largest population, it ranks only fifth in consumption. Savings rates are notoriously high and deeply ingrained in the culture of a society with few safety nets for its citizens, forcing individuals to save in case of unemployment or illness and for old age. But if a combination of rising living standards and confidence in the future encourages consumers to spend more what will they spend it on? Spurred by government incentives, cars certainly seems to be high on the list at the moment. In the first seven months of the year, vehicles sold in China reached 12.3 million on an annualized basis, exceeding the United States for the first time ever, according to Morgan Stanley. Encouraged by cheap loans, property and consumer goods have also seen a surge of demand this year. As property prices have risen, consumers have seen their home as part of their pension for old age, in the same way as property owners do in the west.
So what else are Chinese consumers going to spend their money on? Well probably not the boats, jet skis and even second homes of which US consumers were so fond. Like much of the rest of SE Asia, Chinese buyers appear to be very brand conscious. 60% of Chinese believe that luxury goods are a sign of success and social status. Currently Chinese consumers buy 12% of the luxury goods sold worldwide, and the number of people able to afford such items is expected to quadruple in two years, to 160 million. Contrary to many preconceptions, spending isn’t limited to coastal areas and big cities. Ogilvy & Mather is quoted as saying that two thirds of retails sales are outside the 24 largest cities.
Services may also be big beneficiaries. According to the same research, 70% of Chinese children attend at least one extracurricular program, mostly English classes. Ten million are learning to play violin. One million Chinese people a year get cosmetic surgery. But still the number of credit cards is only 128m last year from a population of 1.3bn with most of those in urban areas. It reminds me of a situation in Harbin a few years ago. The city main downtown had every conceivable luxury brand store one could imagine, but only one ATM machine in a city of nearly 10m.
What holds back spending is the high savings rates, even among the young. Early steps by the government to increase the availability and affordability of health care and social services are a step in the right direction but when the general population believes they are on their own without any state safety net they are going to continue to save a significant portion of their income just in case.
So the conclusion is that Chinese consumption will increase, and relative to other countries will increase at a faster pace, but is unlikely to be able to offset the hard hit US consumers’ role in the global economy anytime soon.