China celebrates 60 years of Communist Party rule this week. But devotion to a socialist ideology seems to have been replaced by pride in rising standards of living and the ability to go shopping, at least in the glittering precincts of Shanghai and Beijing. The Chinese government is expanding subsidies for consumer spending on home appliances. Retail sales during the eight-day national holiday are expected to soar, and 560 million people are expected to travel in China during this holiday week.
Is China, 30 years after its opening to the West, becoming a consumer society? What policies might drive that transformation, and what are the consequences for other nations?
We often think of a country’s underdevelopment in terms of its production capacity: the lack of modern factories, infrastructure and a trained workforce.
But underdevelopment also has much to do with what people buy and what they can use. A limited capacity to make goods, of course, holds down household incomes and purchasing power. More subtly, modern consumption also requires infrastructure and know-how — efficient retailers, backed up by a well-tuned supply chain, persuasive sales and marketing, the availability of credit and the consumers’ ability to use modern goods.
China has been no exception. Booming exports do lead to higher average wages and purchasing power, but because of a vast under-employed labor force, especially in the hinterlands, this does not happen right away.
And growth in consumption of all goods does not progress at an even rate. As incomes rise, demand for basics — more milk, more meat, better clothes — grows faster than the demand for advanced consumer goods, which require more retail infrastructure and education. Marketers have to “teach” consumers about the benefits of a vast range of household products found in American stores, who have never previously encountered these goods –- and how to use them properly.
Setting up the infrastructure for retailing and credit cards is a hard slog.
Beyond these headaches, the Chinese government also has to cope with the political fallout of inequality; lifestyles in Shanghai are as advanced as in any Western metropolis and far ahead of those in rural China. That, too, makes China’s progress toward a consumer-driven economy a difficult balancing act.
The Chinese are already eager consumers, eager to buy many of the same things that Western consumers buy — with an especial fondness for overpriced brand labels. Any visit to the throngs of wistful window-shoppers in Beijing’s Wanfujing or Shanghai’s Nanjinglu, the country’s premier shopping streets, will make this very obvious. So why are the Chinese consuming at what may well be the lowest rate as a share of G.D.P. ever recorded?
Of course subsidies must be paid for, and in China households pay for them in the form of taxes and low wage growth, among other factors. Increasing the growth rate of the economy through investment subsidies paid for by households reduces the share of consumption in the overall economy.
Since the contraction of the U.S. trade deficit almost certainly means that in the medium term China’s growth will be limited by its domestic consumption growth, Beijing has embarked, almost desperately, on a number of policies to goose domestic consumption.
Will these policies work? Perhaps in very specific cases they will cause consumption to increase, but in general Chinese consumption is unlikely to accelerate unless the government reverses policies that forced households to subsidize inefficient producers. But reversing those policies would almost certainly cause unemployment to rise in the short term.
So Beijing is doing the opposite. To prevent rising unemployment caused by the collapse in exports, Beijing has increased the subsidies and support for domestic manufacturing while sharply increasing China’s already-record-breaking levels of investment. It is almost certain that much of the new investment will generate low or even negative returns.
This will not help rebalance the economy. As long as Chinese households must subsidize large amounts of inefficient investment, it will be hard for consumption to take off.
The Income Lag
Yasheng Huang is professor of political economy and international management at Sloan School of Management, Massachusetts Institute of Technology. He is the author of “Capitalism with Chinese Characteristics.”
China has made some progress in moving toward a consumer society and it needs to do so now since the consumption in the West has come down (even if G.D.P. has recovered somewhat).
The policies that were designed to move China toward a consumer society began to be implemented not in the wake of the financial crisis but since 2003 when the current leadership came to power.
Short of a massive income transfer, Chinese household consumption won’t increase fast.
The measures the leaders took since 2003 were designed to increase the income growth of the average households rather than pursuing simple-minded G.D.P. growth. (They were also focused on reducing income inequality and the large urban-rural economic divide.) And they achieved some success in this area.
But even with these positive developments, China is far from being a consumer society. There are some basic limitations on how far China can go in this direction.
For one thing, the per capita household income as a ratio to G.D.P. per capita is about 0.4 to 0.45. Thus if Chinese households spend every single penny of their income (thus driving savings rate to zero), we are talking about a consumption/G.D.P. ratio around 0.4 to 0.45. This contrasts with 0.6 for countries like India, Japan, Korea and 0.7 for the United States.
So unless you have a massive transfer of income to Chinese households, there is no way that the consumption to G.D.P. ratio can rise substantially in the short run. Increasing household income is the key to increasing Chinese consumption but increasing income — short of massive income transfer — takes time.
I don’t believe that China has made more progress toward domestic consumption since the 2008 financial crisis. The widely reported increase in retail sales, for example, incorporates government consumption and my own estimate is that 30 percent of the Chinese retail sales are accounted for by government purchases. The consumer price index shows a consistent decline and it is quite likely that the index — minus food and energy — declined even more. In August I spent a month in China and I saw signs of deflation everywhere. I could eat every day in restaurants with 50 percent of what I spent in August 2008. Chinese restaurants provided generous coupons, a sign of deflation.
A Chinese economist told me that of 22 broad economic sectors 20 of them suffered from over-capacity compared with 16 sectors a year ago. There is no sign yet that Chinese consumption has taken off relative to its massive production capacity, and it is quite possible that the stimulus has made the situation worse.
Culture and Spending
Daniel A. Bell is professor of ethics and political theory at Tsinghua University in Beijing and author of “China’s New Confucianism: Politics and Everyday Life in a Changing Society.”
Economists often reject “Confucian” explanations for high savings rates and low consumer spending in China on the grounds that economic behavior is mainly shaped by government policies. But government policies promoting savings are effective as long-term policies partly because they cohere with cultural predispositions.
Policies designed to promote spending are more likely to succeed if they are in line with cultural predispositions.
Conversely, policies designed to promote spending are more likely to be successful if they cohere with those predispositions. For the Chinese, the key cultural value is the tendency to think of economic behavior not just as a matter of individual interests but as behavior shaped by concern for family members, including elderly parents. In fact, one Chinese economist, Sheng Hong, has studied the economic effects of values like filial piety.
In response to the financial crisis, the Chinese government has spent hundreds of billions on infrastructure projects, such as improving the rail network. Though these projects don’t empower consumers directly, they may improve consumption in the long term.
For example, the big spending bonanza in the Chinese calendar is the Spring Festival, the start of the lunar New Year. But many Chinese put off traveling home for the holiday because of overcrowded transportation systems. Improving the rail system will help increase travel and tourism, and boost consumer spending.
Other cultural policies can affect consumption, too. It’s often argued that Chinese workers and farmers save because they lack decent health care insurance. But promoting health insurance for productive individuals won’t alter that habit if workers are having to save to cover the health expenses of their elderly parents. Tens of millions of migrant workers in China send remittances back home to support elderly parents. So a more promising health care insurance system would be family-based rather than individual-based –- with family members responsible for each other’s insurance, including the obligation of adult children to take out insurance for elderly parents -– similar to the case of Singapore.
In the same vein, giving tax breaks to those who care for elderly parents at home, similar to the case in Hong Kong, would stimulate more consumer spending on housing.
Too Good to Be True
Gordon G. Chang is the author of “The Coming Collapse of China” and a columnist at Forbes.com.
Will China develop a consumer-driven economy? Don’t bet on it.
Historically, consumption accounted for about 60 percent of gross domestic product of the People’s Republic. That number dropped to around 30 percent by 2007, the lowest in the world then. Unfortunately, that percentage is falling at this moment.
Beijing has chosen an anti-consumption tack, so we should be skeptical of statistics showing consumers flooding the shops.
Why? The measures Beijing has adopted to stave off the global downturn are, on balance, anti-consumption. In July of last year, for instance, technocrats reversed the July 2005 currency reforms and went back to their old tactic of tightly pegging the renminbi to the dollar. The maneuver had the effect of making the Chinese currency cheap and imported goods expensive. This, of course, discouraged consumption. More important, Beijing’s $586 billion stimulus program, announced last November, is focused primarily on creating additional industrial production, building infrastructure, and promoting exports. By definition, therefore, the plan undermines the relative importance of consumer spending.
Because Beijing has chosen an anti-consumption tack, we should be especially skeptical of its too-good-to-be-true statistics showing that Chinese consumers have been flooding the shops. Let’s look at the most recent figures, those for August. Beijing said August retail sales increased 15.4 percent. That’s impressive, but the very same government stated that M2, the closely watched measure of money in circulation, increased 28.5 percent and consumer prices declined 1.2 percent that same month.