The Financial Times has kindly published the letter below from the blog today. It argues that affordability, not luxury, is the key need in China, as income levels are very low by comparison with those in the West.
From Mr Paul Hodges.
Sir, Martin Wolf, in "How to blow away China's gathering storm clouds" (March 21), provides an excellent summary of the issues now facing China as it seeks to make the transition from an export-led development model to one based more on domestic consumption.
This transition is not helped by the widespread myth that it has already become a middle-class society. Last year's report from the Asian Development Bank, for example, titled "The rise of the middle class in the People's Republic of China", claimed that by 2007 "there were over 1bn people belonging to the middle class". The ADB defines middle class, however, as those with "$2-$20 (purchasing power parity) per capita daily income". Yet this level would be below the poverty line in most western societies. Equally, its definition of the "super-rich class" includes those with an income of $100/day and above, rather than millionaires and billionaires.
Such wishful thinking represents a significant barrier to the growth of China's domestic consumption. It has led to a major diversion of precious resources, as companies rush to provide western-style goods for a market that doesn't exist. Far too few understand that affordability, rather than luxury, is the key criteria for success.
Mr Wolf's article provides a healthy reminder that China's transition to a developed economy is by no means assured. All those who wish it to succeed would do well to emulate his realism about the difficulties that lie ahead."
Paul Hodges, Chairman, International eChem