Long the place that makes stuff and doesn’t consume much, China is set to redress the balance. And thus, some say, rescue the troubled global economy. But it’s a stretch to think that Beijing’s plan — shifting the export-driven country from emphasizing manufacturing and infrastructure to relying on public consumption – will spread sweet prosperity over the face of the earth.
Optimism about Chinese consumers remains rife in some quarters, even after thissummer’s devaluation of China’s currency, a tanking stock market and slowing economic growth. Goldman Sachs predicted in a recent report that China’s flourishing middle class and their hearty spending will buoy its economy and benefit the wider world. A McKinsey & Co. analysis struck a similarly bullish note.
The irony is that the world’s second-largest economic power is largely to blame for squelching international growth in the first place. China’s economic slowdown, to 6.9 percent in the third quarter from double-digits not long ago, has reverberated far and wide.
Citigroup sees a 55 percent chance of a worldwide recession within the next two years, chiefly courtesy of China’s slowdown. Commodity producers like Brazil have suffered as Chinese demand for its materials has flagged. Developed nations like Germany, which exports a lot of machinery to China, also feel the impact. Bad news out of China also typically shakes stock markets from New York to Tokyo.
Certainly, China’s deceleration from decades of torrid expansion is to be expected. After all, the U.S. (still the No. 1 economy) followed the same pattern of pell-mell gains from the late 1800s through the past century, only to see it taper off. Since the 2008 financial crisis, the U.S. economy has nudged up by only 2 percent or so annually. At least America’s growth is better than that of many other nations. (The U.S. economy was $17.4 trillion last year, compared with $10.4 trillion for China, the World Bank says.)
Of course, tepid growth satisfies no one, and prompts politicians to call for rejuvenation schemes, some rather dubious. Just as several American presidential candidates claim they can rev up economic output through tax cuts, Chinese leaders say they have their own key to improving the nation’s performance. Enter their chosen savior: the consumer.
Specifically, Beijing says, the answer is to bolster people’s spending, which will have a salutary and permanent ripple effect on its economy.
“Despite a slowdown in the industrial sector, China’s services sector is growing rapidly,” said Sheng Laiyun, a spokesman for the Chinese statistics agency, announcing the latest downshift in gross domestic product. The new 6.9 percent growth rate marked a six-year low.
“We will continue to increase household consumption and make sure that greater internal demand could serve as a new power to drive economic growth,” Premier Li Keqiang told a global economic forum last year.
Among government plans to kick-start the process: debuting a nationwide pension system, offering universal medical insurance and alleviating some taxes for businesses. It is encouraging banks to pay depositors more on their savings, and to help smaller companies, letting nonbank lenders offer financing. Last month, Beijing cut the tax on purchases.
The idea is that an economy more reliant on consumers is more stable than one that churns out goods for sale to foreign buyers whose fortunes fluctuate. Plus, the thinking goes, a consumer-centered economy may be less prone to constructing enormous boondoggles like China’s high-speed rail project and its millions of vacant apartments.
Without a doubt, Chinese consumer spending has gotten bigger thanks to the nation’s economic ascension (In 2011 it overtook Japan for second place in the world GDP ranking.) Retail sales advanced 11 percent in October, the fastest increase this year, government statisticians reported. The recent SinglesDay, a shopping spree event akin the U.S.’s Black Friday, enjoyed huge sales.
Although China is nominally communist, the roster of its mega-rich has burgeoned and generated tales reminiscent of America’s Gilded Age. This past week, Chinese billionaire Liu Yiqian paid $170 million for a 1918 painting by Amedeo Modigliani.
But these signs of success are overwhelmed by a daunting structural weakness: China’s overall consumer spending is quite small. Getting anywhere near the level of developed nations like the U.S. and Britain, where consumers dominate economic life, will be tough.
A report from the Demand Institute, a branch of New York-based think tank The Conference Board, concluded: “While Chinese consumer spending has grown in absolute terms, consumption as a share of GDP has steadily declined for six decades.”
By the group’s reckoning, consumer activity in China now stands at a mere 28 percent of the economy, versus over 70 percent in the U.S. Although others place China’s consumer share higher, using different measurements, the figure is undeniably on the low end in rankings such as that from the World Bank.
In addition, the government effort to produce a consumer-tilted culture faces several powerful headwinds:
The Chinese savings ethic is sacrosanct. In China, the public saves a towering 30 percent of disposable income. Compare that with the U.S. savings figure, 5 percent. It’s axiomatic: If you hold onto more of your money, then you spend less. Yes, China’s new urban professional class may open their wallets like Americans. For a lot of Chinese, however, the old habits of thrift will he hard to shuck.
Many Chinese are poor. In fact, one out of 10 of them are in poverty, which is concentrated in the rural areas. Rural dwellers earn an average $1 per day. Obviously, that’s a lot of people who can’t contribute much to boosting the consumer economy. The government has shown, on the other hand, that throwing money at this problem can help. As migrants crowded the cities, looking for work, Beijing paid them subsidies, an act that slashed urban poverty.
The population is aging. While one of China’s strengths is a large population — at 1.37 billion, it is the most populous country on earth — the working-age citizenry is shrinking. A society increasingly skewed toward the elderly is an obstacle for the ambitious plans to hike consumption.
The reason: Older folks tend to spend less than the young. Now, 10 percent of Chinese are over 65, a figure that is estimated to reach 15 percent in 2017 and 20 percent in 2035.
The situation largely stems from the draconian policy, instituted in the late 1970s, limiting couples to one child. The government rescinded this rule last month, but no one expects that a baby boom is about to explode, since old habits are hard to overcome. Besides, even if births did resume at a normal pace, relative to other places, changing the nation’s demographics would take a generation at the minimum.
For sure, at some point China will arrive at a consumer-centric economy, much as the U.S. has. Such a day, though, is a long way off. And the result is that, for the foreseeable future China won’t be igniting a second-stage booster rocket to send the rest of the world skyward.
Text:MONEYWATCH By November 13, 2015, 3:23 PM