China’s consumers will power global growth

China’s consumers will power global growth

Danai Pathomvanich
Dec 4, 2015

Despite constant calls to rebalance China’s export-driven economy into more of a consumption-driven economy, China’s consumers will still power global growth in the next decade.

In their recent best seller, “The one hour China book”, Jeffrey Towson and Jonathan Woetzel said China’s consumer story is awesome in spite of public perceptions that economic growth is slowing and demonstrates a need for “rebalancing”.

“The reality is that Chinese consumers are going to continue to increase in wealth and complexity.”

At the same time, its consumer spending will become the largest in the world and a major driver of global growth.

Slowing economic growth

For decades, China has led the world with double-digit annual economic growth. Even with slowing growth, the economy is still growing at a healthy six per cent per annum.

Similar to most Asian economies, China’s early growth has been based on savings, investment and exports.

“This process enabled China to develop its infrastructure with its own cash.”

Investment first approach

China’s investment-first approach, the authors said makes consumption look small and often like its shrinking.

“Chinese consumption decreased from approximately 51 per cent of GDP in 1985 to 43 per cent in 1995, 38 per cent in 2005 and 34 per cent in 2013.”

By comparison, Japanese consumption is 62 per cent of GDP and 68 per cent in the US.

China’s small and decreasing consumption percentage, is one reason why people talk about rebalancing and the need for more consumer spending rather than increasing investments and exports.

Growing economic size is what counts

However, the authors said the Chinese economy’s continuous growth is a number everyone should be concerned with.

From 2000 to 2010, China’s economy more than doubled and consumption grew from about $650 billion to $1.4 trillion.

Despite consumer spending falling as a relative percentage to GDP, China’s consumption has been growing faster than just about any other country’s in absolute terms.

If China is able to get consumer spending back to 43 per cent of GDP (1995 level), it would create the largest consumer market in the world.

Almost impossible to measure

The authors said consumer spending is almost impossible to accurately measure in China’s large complicated economy.

“Combining a vague number with two other vague numbers (investment and net exports) is very fuzzy math.”

Household income matters

In measuring China’s consumer spending impact, the authors said household income is the most important number.

Rising household incomes will translate into higher consumer spending.

China’s current household income is estimated at a massive $5 trillion per year, which according to the authors is a lower boundary calculation because large amounts of income are unreported.

Rising discretionary spending

The most exciting element of China’s consumer spending growth is rising discretionary spending described by the authors as “buying the stuff you like but don’t need”.

Chinese citizens can now afford more than life’s basics and discretionary spending is skyrocketing.

“Growth in spending on annual discretionary categories in China is forecast to
exceed seven per cent between 2010 and 2012, and growth of six to seven per cent annually is in a second category of semi-necessities.”

China’s saving tradition

China’s high savings rate is highly cultural and not unique because Japanese, Korean and Taiwanese savings rates were similar in early development periods.

The authors predict that when strong health and retirement safety nets are inevitably put in place, the savings rate will fall.

A further roadblock to savings growth is China’s still underdeveloped consumer finance system.

“It’s tough to use debt to hit truly spectacular consumptions levels. After all, a vacation home or car may cost the equivalent of a year’s income.

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