There are several factors holding back the Chinese consumer

TO BE NOTED: From the FT:

"China’s consumption is a disappearing act

Published: April 8 2009 19:46 | Last updated: April 8 2009 19:46

In January, a remarkable thing happened: more cars were bought in China, the land of bicycles, than in the US, the land of – well – cars. US annual light vehicle sales skidded below 10m, fewer than in China where January sales ran at 10.7m a year. For those counting on the Chinese consumer to ride to the world’s rescue, here, surely, was the news they had been waiting for.

Unfortunately, those vehicle numbers were not quite what they seemed. Nor – not yet, at least – is the Chinese consumer.

It turns out that China and the US count cars differently and that China’s numbers were temporarily flattered by the lunar new year. Still, China remains a bright spot in the thickening gloom. Other industries too are counting on the Middle Kingdom, the largest market for television sets and mobile phones, steel and cement. Shiseido, a Japanese cosmetics company, has been racking up 30 per cent Chinese sales growth. Alex Salmond, Scotland’s first minister, on a clean-energy-to-whisky sales tour of China this week, revealed there were more cashed-up Chinese than American students in Scottish universities.

The 19th-century Englishman who mused that, if every Chinese lengthened his shirttail by a foot, textile mills would spin year-round, has been replaced by 21st-century westerners hoping that Chinese will step in to buy their sedans and insurance products. But can they?

The picture is not easy to decipher. By some measures, Chinese consumers have in fact become relatively less important. In the 1980s, household consumption averaged slightly more than half China’s gross domestic product. That proportion fell in the 1990s to 46 per cent, reached 38 per cent by 2005 and is about 35 per cent today. By comparison, in 2007 US household consumption was running at what we now know was an unsustainable 72 per cent of GDP.

Andy Rothman, China strategist at CLSA, says people should not get hung up on that comparison. Just as in 1950s Japan, he says, a much bigger share of China’s GDP is today going to investment, something that changed in Japan only in the 1960s when consumers began to buy fridges and washing machines. Consumption rates tend to be higher in poorer countries than China where people spend a large part of their income to survive, and richer ones where discretionary spending takes hold.

Jonathan Garner, emerging markets strategist at Morgan Stanley, is another believer. In his 2005 The Rise of the Chinese Consumer, he predicted that by 2014 Chinese consumption would have risen from 9 per cent of US and 3 per cent of world consumption in 2004 to 37 per cent and 10.5 per cent respectively. By then, he forecast, the Chinese shopper would have displaced the US consumer “as the engine of world growth”. He says his prediction is still on track.

Nicholas Lardy at the Peterson Institute in Washington is more circumspect. He applauds Beijing’s attempt to rebalance a lopsided economy that is too dependent on capital investment and external demand. But so far, it has not worked. Investment probably reached a high of 43.5 per cent of GDP in 2008.

There are several factors holding back the Chinese consumer. First, people have for years witnessed the destruction of the “iron rice bowl”, as once-free health and education systems have been dismantled. Now the government is committed rhetorically – and, increasingly, in practice – to rebuilding the social safety net. But it will be years before people trust the state to look after them, and run down their precautionary savings.

Second, most Chinese are what Dragonomics, a research firm, calls “survivors”, whose purchases of basic food and clothing are meaningless for multinationals or global demand. Only about 150m are part of “consuming China”, although this may double to 300m by 2015. Consuming China’s median household income is about $6,000, against $45,000 in the US. The owner of a Beijing car does not spend like the owner of a Boston car.

Finally, China’s recent consumption boom has been predicated on rising income, itself a function of strong external demand. Growth should continue at 7-8 per cent, but the days of double-digit expansion may be over. So, rather than accelerate, Chinese household purchases may in fact slow. It turns out that Americans have been paying for everything with credit – even Chinese consumption."