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China: Consumption And Hot Air

Business, China, Company Strategy, Economics
By John Richardson on 07-Nov-2012

Chinaspending.pngSource: New York Times


By John Richardson

TALK of a billion plus Western-style consumers is nothing more than hot air, with the temperature maintained by the financial sector eager to sell you its products.

The reality is very different, as this article from the New York Times describes. In the third of our series of blog posts ahead of the start of tomorrow’s 18th Party Congress, when China’s next generation of leaders will be selected, we look at the risk that China will remain a poor country.

And the NYT points out that “China risks repeating the mistakes Japan made in the 1980s and early 1990s, when it relied too long on a predominantly export economy, neglected domestic markets and allowed real estate prices to soar. Since Japan’s bubble burst in the mid-1990s, its economy has never really recovered.”

In summary, the problems lie with the support provided to the state-owned enterprises (SOEs), as we discussed in detail yesterday. Savings rates have been kept below the rate of inflation in order to provide cheap finance for the state-owned giants, and for infrastructure investment.

Low-cost finance has also flowed into property speculation, driving up the cost of homes way beyond the means of many urban dwellers.

In the late 1990s, also, the “iron rice bowl” was demolished. This transferred the cost of healthcare and pension provision from the government to its citizens.

Thus, savings rates are high as the hard-pressed “middle income” earners (not be conflated with “middle class” as this leads to erroneous comparisons with what this means in the West) hoard money for an uncertain future.

The reality, therefore, in Jilin City, is not one of an army of Chinese queuing up to buy Gucci handbags and BMWs.

It is instead one of consumer options “limited (to) offerings of dingy state-run department stores and mom-and-pop shops. Any sales of global ‘brands’ come mainly in the form of the counterfeits and knockoffs often sold at outdoor markets,” the NYT adds.

Can China change?

The good news is that Xi Jinping, the country’s likely new president, backed the World Bank report, released in February that identified some of the required reforms.

The bad news is that “vested interests” will fight tooth and nail to maintain the current system.