The primary engine of global demand ? the US consumer ? is losing steam. Deep in debt and unnerved by falling real estate values, the
US consumer can no longer be counted on to shoulder the burden of global growth. Not to worry, goes the emerging consensus.
An alternative engine of global demand is the Chinese consumer, whose appetite for mobile phones, computers, televisions and other consumer staples has exploded in the past decade. And it's not just the basics the Chinese are snapping up: China ranks as the third-largest consumer of luxury goods in the world. More Bentleys are sold in Beijing than in any other city in the world.
But investors beware. It's not all fast cars and fancy malls for the average Chinese consumer. The importance of the consumer to economic growth in China has actually diminished. Growth in household consumption has lagged behind the underlying pace of the overall economy for the balance of this decade ? even though household consumption outlays in China almost doubled between 2000 and 2006. Household consumption as a percentage of gross domestic product dropped from 46.4 per cent in 2000 to 36.4 per cent in 2006, leaving the mainland with one of the lowest consumption-to-GDP ratios in Asia. While super-charged levels of capital investment and exports have diminished the role of the Chinese consumer, something more fundamental is at work. The average consumer in China is not a credit card-touting shopper.
Rather, saving continues to trump spending. The average Chinese family squirrels away a quarter of its after-tax income, one of the highest savings rates in the world. Why such a high level of savings? Prudence is one factor. Fear of the unknown is another.
While many investors are well versed in China's stunning economic rise over the past three decades, most have paid too little attention to the wrenching social and economic issues that the nation faces. Millions of households can no longer count on the cradle-to-grave social welfare programmes of the Iron Rice Bowl. Many of these benefits have been scaled back or eliminated in the past decade and Chinese consumers have been saddled with the burden of paying for healthcare, pensions, education and housing.
For instance, just half of China's urban population has basic health insurance, according to the Organisation for Economic Co-operation and Development, while fewer still are covered in the rural areas. All told, medical expenses account for nearly 12 per cent of household spending.
While Chinese consumers have little choice but to save for unexpected medical costs, the same holds true when it comes to retirement and unexpected job losses. Only 17 per cent of the population are covered under any basic government pension scheme, while just 14 per cent of China's workforce was covered by unemployment insurance in 2005. Education represents another significant expense for the typical Chinese family. Per capita expenditure on education ? a national obsession ? accounts for about 8 per cent of total household consumption and that figure is increasing along with escalating expenses related to schooling. For many rural families, school fees can be the equivalent of one year's income.
Add rising housing costs, which have increased as government subsidies on housing have declined, and increased spending on care for China's elderly.
Against this backdrop, while many college graduates in China dream of being the next Bill Gates, many crave or prefer the security of a state job. Being a civil servant means good medical benefits, a retirement pension and discounts on housing and education. The premium on landing a state job speaks volumes about the risk-adverse mindset of the average Chinese household and does not portend a rebalancing of economic growth any time soon in China.
Investors should not bank on the Chinese consumer to save the global economy should the US consumer run out of steam and tip the American economy into recession. The inconvenient truth is that Chinese consumers are not ready to supplant US consumers as the primary engine of global demand.
US consumer can no longer be counted on to shoulder the burden of global growth. Not to worry, goes the emerging consensus.
An alternative engine of global demand is the Chinese consumer, whose appetite for mobile phones, computers, televisions and other consumer staples has exploded in the past decade. And it's not just the basics the Chinese are snapping up: China ranks as the third-largest consumer of luxury goods in the world. More Bentleys are sold in Beijing than in any other city in the world.
But investors beware. It's not all fast cars and fancy malls for the average Chinese consumer. The importance of the consumer to economic growth in China has actually diminished. Growth in household consumption has lagged behind the underlying pace of the overall economy for the balance of this decade ? even though household consumption outlays in China almost doubled between 2000 and 2006. Household consumption as a percentage of gross domestic product dropped from 46.4 per cent in 2000 to 36.4 per cent in 2006, leaving the mainland with one of the lowest consumption-to-GDP ratios in Asia. While super-charged levels of capital investment and exports have diminished the role of the Chinese consumer, something more fundamental is at work. The average consumer in China is not a credit card-touting shopper.
Rather, saving continues to trump spending. The average Chinese family squirrels away a quarter of its after-tax income, one of the highest savings rates in the world. Why such a high level of savings? Prudence is one factor. Fear of the unknown is another.
While many investors are well versed in China's stunning economic rise over the past three decades, most have paid too little attention to the wrenching social and economic issues that the nation faces. Millions of households can no longer count on the cradle-to-grave social welfare programmes of the Iron Rice Bowl. Many of these benefits have been scaled back or eliminated in the past decade and Chinese consumers have been saddled with the burden of paying for healthcare, pensions, education and housing.
For instance, just half of China's urban population has basic health insurance, according to the Organisation for Economic Co-operation and Development, while fewer still are covered in the rural areas. All told, medical expenses account for nearly 12 per cent of household spending.
While Chinese consumers have little choice but to save for unexpected medical costs, the same holds true when it comes to retirement and unexpected job losses. Only 17 per cent of the population are covered under any basic government pension scheme, while just 14 per cent of China's workforce was covered by unemployment insurance in 2005. Education represents another significant expense for the typical Chinese family. Per capita expenditure on education ? a national obsession ? accounts for about 8 per cent of total household consumption and that figure is increasing along with escalating expenses related to schooling. For many rural families, school fees can be the equivalent of one year's income.
Add rising housing costs, which have increased as government subsidies on housing have declined, and increased spending on care for China's elderly.
Against this backdrop, while many college graduates in China dream of being the next Bill Gates, many crave or prefer the security of a state job. Being a civil servant means good medical benefits, a retirement pension and discounts on housing and education. The premium on landing a state job speaks volumes about the risk-adverse mindset of the average Chinese household and does not portend a rebalancing of economic growth any time soon in China.
Investors should not bank on the Chinese consumer to save the global economy should the US consumer run out of steam and tip the American economy into recession. The inconvenient truth is that Chinese consumers are not ready to supplant US consumers as the primary engine of global demand.