China's consumers deserve some creditApril 17, 2012: 10:31 AM ET
Calls for an economic stimulus in China to boost consumer spending may be premature. The Chinese may be spending more than statistics suggest.
GDP decelerated to 8.1% during the first three months of 2012, compared with a year earlier, according to data released by China's National Bureau of Statistics last week. The growth was lower than the 8.4% that analysts expected, fueling concerns in international markets about weakening demand in the world's fastest-growing large economy.
But there was one bright spot: Spending by households and government proved resilient, contributing to 76% of GDP – up from an average of 41.6% during the past decade. This is particularly surprising, given that China has long been known as a nation of savers.
True, the rise largely reflects the drop in exports and investments. China's goods and services sold abroad have driven its economy for years, but that has slowed since the global financial crisis. And the outlook remains bleak as the debt crisis in Europe, China's biggest export market, sees little end in sight. As for investments, what China spends on infrastructure and the like accounts for almost half of its economy – a level many economists and officials have said can't continue.
To narrow its trade surplus, China's oft-stated goal has been to rebalance growth so that its citizens save less and spend more. Not to say that China today is anywhere close to achieving that, but last week's GDP data suggests that perhaps tentative progress has been made. If not that, then it at least speaks to the steadiness of the Chinese consumer.
Of course, part of the resilience of China's consumers comes from their rigid saving habits, which the Chinese government has been trying to reverse under its five-year plan for 2011-15. On average, they save one-third of their incomes, compared with 4.4% in the U.S., according to McKinsey & Company's 2011 annual Chinese consumer survey.
But even as the Chinese economy slows, consumers appear quite optimistic. This comes as local governments push wages higher in efforts to boost consumption at home, as part of the five-year plan to raise the minimum wage at least 13% annually. Earlier this year, two of China's leading cities, Beijing and Shenzen, raised minimum wages. During the first quarter, urban real wages rose 9.8% from a year earlier, while wages in rural areas rose 12.7% during the same period. And for the past two years, wages grew 22% nationwide.
However, higher wages have been met with rapidly rising prices. So the extra spending that the pay bumps would have generated could have been higher if not for inflation. Nevertheless, consumption has stayed steady as most Chinese think wages will rise further in the future. Whereas 39% of consumers in 2010 said they expect their incomes to rise in the next year, 58% surveyed in 2011 said they see higher pay in the horizon, according to McKinsey.
If we take into account the hundreds of thousands of smaller restaurants and shops that dot across the country, households are spending markedly more than statistics would suggest, says Shaun Rein, managing director of Shanghai-based China Market Research Group. This is because sales at such businesses are often grossly underreported, since local governments often negotiate tax payments on sales upfront using an estimate rather than basing it on actual transactions.
"The Chinese consumer is extremely confident right now," says Rein, author of The End of Cheap China: Economic and Cultural Trends that will Disrupt the World.
Chinese demand is certainly robust. But there's still plenty Beijing needs to do to make consumers feel comfortable with spending more. And while China's five-year plan includes everything from a greater focus on jobs to more funding of social safety nets, it remains to be seen how the plan gets implemented.