Don’t rush the Chinese to become big spenders
As the financial crisis forces American consumers to curb their shopping binges, the world starts to realize that China’s high savings level has some upsides, marking Chinese consumption as the most resilient in the world.
Beijing has to, however, be careful in how far it goes to encourage domestic spending to help the economy ride the global downturn. Credit-driven booms and consequent busts from the United States to South Korea are pointers to the need for caution.
About 75 percent of Chinese consumers plan to maintain or increase spending in the next 12 months, while almost 60 percent in the United States and the European Union expect to reduce spending, a recent Boston Consulting Group survey found.
Although economists have been saying China needs to reduce its savings rate to rebalance the economy, its high savings rate has turned out to be an asset rather than a liability for itself and the world during the economic downturn.
Chinese consumers are more insulated from the economic turmoil because they are less leveraged. Only 12 percent of Chinese said they are financially insecure, while more than a third of U.S. and EU respondents felt they were in financial trouble, according to the BCG survey.
Contrary to the common belief that the Chinese all behave like Grandet — the miser in Balzac’s novel Eugenie Grandet — the Chinese have been quite willing to spend in recent years. Retail sales growth has outperformed GDP growth for five straight years.
The reason that Chinese still save nearly half their income is because consumption growth cannot keep up with the speed of wealth creation.
During exceptionally high economic growth, much of the increased income will be saved. Spending behavior does not change overnight.
When a Chinese peasant wins the lottery, instead of buying a yacht or a Jaguar, he is more likely to put most of the money in the bank.
Nevertheless, Chinese consumption will catch up as its citizens get more accustomed to a richer lifestyle. But the process will take at least two decades for structural changes like urbanization and demographics to run their course rather than the two years going by some shopping incentives introduced recently by Beijing.
It is hard to imagine that China’s consumption contribution to GDP was even higher than the ratio in America nearly three decades ago, but people lived miserably then. In 1981, when China just started to open itself up to foreign trade, consumption accounted for a whopping 93.4 percent of GDP.
Saving was a luxury at that time because most families struggled to make ends meet. Families grabbed whatever consumer goods they could find because of shortages in almost everything from eggs to fabrics.
The West has for years clamoured for more domestic spending on the Chinese side, but they have to be careful in what they wish for. If the Chinese become big spenders overnight, who is going to finance U.S. consumers?
Also, imagine the pollution when the car penetration level in China reaches that of America, which means the number of cars in what is already the world’s largest market would run into several hundreds of million.
Before China establishes a social safety net for its citizens, it is irresponsible to ask them to squander their nest eggs away on bags and cars.
The South Korean credit card bubble has shown that a credit-driven boom, if not controlled, could end in tears.
To promote private consumption after the technology bubble burst, Seoul cajoled people to use credit cards by offering them tax deductions and even a shot at a lottery.
Korea’s consumption soared as a result, but quickly slumped after credit card default rates surged as people started to spend beyond their means.
Beijing has been flooding the market with cheap credit and throwing around all sorts of incentives, such as tax rebates, subsidies and shopping coupons to encourage domestic spending to boost economic growth.
The strategy may have succeeded in boosting short-term spending, but China should not overdo the incentives in order to avoid Korea’s pitfalls.
Persuading Chinese consumers to spend a lot more when wealth creation slows is both impossible and potentially risky.
Instead, officials should ensure they put the extra savings to better use to reduce global imbalances. Chinese surplus savings end up as investments in U.S. Treasuries, which effectively financed U.S. consumers and homeowners in their economic bubble inducing binges.
China should redirect surplus savings to other developing countries and emerging markets, those with abundant resources and low labor costs, but in need of capital.
These economies, from South America to Africa, are the future growth engines of the global economy. By doing so, China will help reduce the global imbalance rather than worsen the problem.
— At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —
(Editing by Mathew Veedon)