To turn spenders, savers first need social safety net, real income growth
By Grace Ng 1 June 2009
If the world’s economies could vote for a saviour to pull them out of the current economic doldrums, the Chinese consumer may well top the polls.
But no: China’s 1.3 billion consumers are neither ready nor willing to take the lead in driving growth in the Chinese economy, let alone the global economy. Nor can the world count on a second stimulus package from Beijing to boost consumption - one of the hottest topics of speculation currently.
Unless China rejigs its savings and lending patterns and boosts consumer confidence with more real income growth, any amount of stimulus will simply yield artificial growth spurts.
There is no doubt that China’s consumption is growing at an impressive rate - faster than in most other countries, in fact. But it is still a laggard in investments and exports. With these two growth engines sputtering amid the global downturn, consumption looked for a while as though it might be the saviour.
China’s leaders vowed in March to shift the economy towards a consumption-led model. A flurry of multi-billion-yuan stimulus measures - such as subsidies for farmers to buy goods - followed. The world cheered as China reported record car sales. Home appliances flew off the shelves in March and April.
In April, retail sales rose 14.8 per cent from a year ago, prompting state news agency Xinhua to proclaim that China is ‘seeing initial results in boosting domestic consumption’. In the first quarter this year, consumption contributed 4.3 percentage points - the largest chunk - of the 6.1 per cent growth in the economy.
A clear sign that consumption is taking the driver’s seat? Hardly, say economists.
A closer look shows that the retail data reflected subsidy-induced consumption rather than a permanent change in spending patterns. With the first wave of subsidies over, consumers have returned to stashing away cash in low-interest bank accounts or under mattresses. Retail industries, including electronics, weakened last month, noted Credit Suisse economist Tao Dong. He warned that China’s recovery began to falter in the second half of April and slackened further last month.
Chinese academics and political leaders have also begun to urge caution in expecting a quick economic recovery driven by consumption. Mr. Chen Deming, head of China’s Ministry of Commerce, criticised last month the view that China was too reliant on exports. He noted that exports raise incomes, thus boosting domestic consumption.
His comments, printed in the Chinese Communist Party magazine Quishi, was taken as a signal that Beijing now recognises that shifting to a consumption-driven economy will take considerable time.
Much of the blame for China’s low consumption rate has been laid squarely on the formidable Chinese saver, who stashes away half his income, compared with just 4 per cent for Americans.
And unlike the latter, who spend more the lower bank deposit rates are, the Chinese have a peculiar habit of saving more the more measly bank rates are - to make up for the difference, as Beijing University professor Michael Pettis said.
Until Beijing’s health-care reforms create a strong enough social safety net next year - or in 2020, as sceptics predict - the average Chinese household will have to save as much as it can just to afford a sickbed. And until the masses have enough income to spend, they won’t.
Slow income growth, not high savings rates, is the key reason why consumption has fallen as a percentage of the gross domestic product over the past 20 years, argued Professor Huang Yasheng of MIT’s Sloan School of Management.
People in rural areas, in particular, saw their incomes grow just 5 per cent last year, compared with about 11 per cent in the past few years. With 20 million migrant workers expected to be out of jobs, rural wages will take an even bigger hit. Premier Wen Jiabao pledged in March to boost the proportion of national income going to wages, especially to farmers.
Still, measures such as helping farmers start businesses and allowing them to transfer and lease land use rights may only yield benefits later - for the next generation. A faster way to lift the Chinese’s spending power would be to offer them easier credit to buy now rather than later.
But with China’s bank-lending favouring large enterprises, the retail customer has had to swallow relatively steep interest rates and tough loan terms.
Last week, Beijing announced a new scheme to offer so-called ‘spending loans’ to consumers to finance anything from weddings to tours and electronics.
But the impact is likely to be puny compared with the frenetic surge in corporate lending to fund projects in Beijing’s 4 billion yuan (S$845 million) stimulus plan.
Some, like Prof Pettis, fear that this indiscriminate lending will eventually lead to a mountain of bad loans. The burden may eventually fall on taxpayers, snatching away a part of their income that should have gone to consumption.
Little wonder then that patience is the only answer left that Beijing can give to those expecting the Chinese saver to become a spender. Still, the Chinese do have one thing in their favour: Confidence, which Premier Wen has said repeatedly is ‘more precious than gold’.
Unfazed by the global economic crisis, three-quarters of China’s consumers plan to maintain or even increase their spending next year - nearly double the proportion who say the same in the United States and European Union, a recent Boston Consulting Group study found.
But the real confidence booster will come when China revamps its income and loans structure. Till then, the global economy will have to look elsewhere for a leader.
2 comments:
Chinese consumers can’t power recovery
To turn spenders, savers first need social safety net, real income growth
By Grace Ng
1 June 2009
If the world’s economies could vote for a saviour to pull them out of the current economic doldrums, the Chinese consumer may well top the polls.
But no: China’s 1.3 billion consumers are neither ready nor willing to take the lead in driving growth in the Chinese economy, let alone the global economy. Nor can the world count on a second stimulus package from Beijing to boost consumption - one of the hottest topics of speculation currently.
Unless China rejigs its savings and lending patterns and boosts consumer confidence with more real income growth, any amount of stimulus will simply yield artificial growth spurts.
There is no doubt that China’s consumption is growing at an impressive rate - faster than in most other countries, in fact. But it is still a laggard in investments and exports. With these two growth engines sputtering amid the global downturn, consumption looked for a while as though it might be the saviour.
China’s leaders vowed in March to shift the economy towards a consumption-led model. A flurry of multi-billion-yuan stimulus measures - such as subsidies for farmers to buy goods - followed. The world cheered as China reported record car sales. Home appliances flew off the shelves in March and April.
In April, retail sales rose 14.8 per cent from a year ago, prompting state news agency Xinhua to proclaim that China is ‘seeing initial results in boosting domestic consumption’. In the first quarter this year, consumption contributed 4.3 percentage points - the largest chunk - of the 6.1 per cent growth in the economy.
A clear sign that consumption is taking the driver’s seat? Hardly, say economists.
A closer look shows that the retail data reflected subsidy-induced consumption rather than a permanent change in spending patterns. With the first wave of subsidies over, consumers have returned to stashing away cash in low-interest bank accounts or under mattresses. Retail industries, including electronics, weakened last month, noted Credit Suisse economist Tao Dong. He warned that China’s recovery began to falter in the second half of April and slackened further last month.
Chinese academics and political leaders have also begun to urge caution in expecting a quick economic recovery driven by consumption. Mr. Chen Deming, head of China’s Ministry of Commerce, criticised last month the view that China was too reliant on exports. He noted that exports raise incomes, thus boosting domestic consumption.
His comments, printed in the Chinese Communist Party magazine Quishi, was taken as a signal that Beijing now recognises that shifting to a consumption-driven economy will take considerable time.
Much of the blame for China’s low consumption rate has been laid squarely on the formidable Chinese saver, who stashes away half his income, compared with just 4 per cent for Americans.
And unlike the latter, who spend more the lower bank deposit rates are, the Chinese have a peculiar habit of saving more the more measly bank rates are - to make up for the difference, as Beijing University professor Michael Pettis said.
But who can fault the Chinese saver?
Until Beijing’s health-care reforms create a strong enough social safety net next year - or in 2020, as sceptics predict - the average Chinese household will have to save as much as it can just to afford a sickbed. And until the masses have enough income to spend, they won’t.
Slow income growth, not high savings rates, is the key reason why consumption has fallen as a percentage of the gross domestic product over the past 20 years, argued Professor Huang Yasheng of MIT’s Sloan School of Management.
People in rural areas, in particular, saw their incomes grow just 5 per cent last year, compared with about 11 per cent in the past few years. With 20 million migrant workers expected to be out of jobs, rural wages will take an even bigger hit. Premier Wen Jiabao pledged in March to boost the proportion of national income going to wages, especially to farmers.
Still, measures such as helping farmers start businesses and allowing them to transfer and lease land use rights may only yield benefits later - for the next generation. A faster way to lift the Chinese’s spending power would be to offer them easier credit to buy now rather than later.
But with China’s bank-lending favouring large enterprises, the retail customer has had to swallow relatively steep interest rates and tough loan terms.
Last week, Beijing announced a new scheme to offer so-called ‘spending loans’ to consumers to finance anything from weddings to tours and electronics.
But the impact is likely to be puny compared with the frenetic surge in corporate lending to fund projects in Beijing’s 4 billion yuan (S$845 million) stimulus plan.
Some, like Prof Pettis, fear that this indiscriminate lending will eventually lead to a mountain of bad loans. The burden may eventually fall on taxpayers, snatching away a part of their income that should have gone to consumption.
Little wonder then that patience is the only answer left that Beijing can give to those expecting the Chinese saver to become a spender. Still, the Chinese do have one thing in their favour: Confidence, which Premier Wen has said repeatedly is ‘more precious than gold’.
Unfazed by the global economic crisis, three-quarters of China’s consumers plan to maintain or even increase their spending next year - nearly double the proportion who say the same in the United States and European Union, a recent Boston Consulting Group study found.
But the real confidence booster will come when China revamps its income and loans structure. Till then, the global economy will have to look elsewhere for a leader.
Post a Comment