Monday, April 13, 2009

China may wind up with a growing urban underclass rather than a bulging middle class

TO BE NOTED: From Dragonbeat:

Beware foreign bluster about tapping the Chinese consumer

April 13, 2009 12:13pm

By Tom Miller and Will Freeman

“Rebalancing the global economy” is the mantra of the day - and China, we are told, must play its part. That means shifting China’s economy away from an unhealthy reliance on exporting goods to foreign consumers and instead boosting consumption at home.

Last week, we argued that China’s fast pace of urbanisation, which is projected to see the urban population rise from 600bn today to more than 1bn by 2030, would keep demand for commodities high. It seems a small leap of logic to conclude that growing urbanisation - and the accompanying rise of an “urban middle class” - will have a similar impact on consumer goods.

Everyone, including policymakers in Beijing, agrees that China needs to rebalance its economy. But simply moving farmers into factories will not make them economically significant consumers: for all the country’s growing sovereign wealth, most ordinary Chinese remain poor.

Outside a few cities on the east coast and a handful of interior provincial capitals, private spending power is negligible. Chinese households with annual per-capita expenditure below US$5,000 - about 90 per cent of the population - spend most of their money on subsistence items such as housing, clothing and food.

Foreign bluster about tapping the Chinese consumer ignores the fact that average incomes are still substantially below the level needed both to drive a consumer economy and to provide a viable market for higher-priced foreign goods.

Research by MasterCard suggests that multinational consumer goods companies require a concentration of at least 200,000 “consumption households” - those with annual per-capita expenditure above US$5,000 - to establish a viable market. But the vast majority of China’s cities have nothing close to such a concentration of consumers.

Economically significant consumers primarily reside in three regions: the Yangtze River Delta, the Pearl River Delta and the Beijing-Tianjin corridor. Although there is a growing number of “consumption households” dispersed across the rest of the country, they are frequently not concentrated enough to justify a sales and distribution presence for many products and services.

China’s transport system has improved markedly in the past decade, but distribution costs remain a barrier to setting up in the hinterland. Logistics costs account for 20 per cent of average goods prices in China, compared to around 10 per cent in the US.

Even in conveniently located large cities, where higher incomes allow some households to enjoy Western-style consumerism, few new migrants have genuine spending power. Urbanisation’s contribution to consumption depends on incomes at the margin, and the living standard of the vast majority of new migrants in big cities is well below that of the average urbanite.

Over time, average per capita incomes will rise and urban retail markets will grow. Letting the renminbi appreciate would also make foreign goods cheaper for Chinese consumers.

But if more effort is not made to give migrants better access to social services, in particular, improving public health and education provision, China may wind up with a growing urban underclass rather than a bulging middle class. And that is hardly the recipe for the long-awaited consumer boom."

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