Chinese may take place of Americans as spenders

Chinese may take place of Americans as spenders

FMCG SUPPLIER NEWS

IOL Business - Feb 20th, 08:14

The Chinese consumer may not qualify for the description “big spender”. But the traditionally thrifty Chinese may spend more than was previously thought on the things that keep households ticking over every day. 

This conclusion, by Chinese economist Yiping Huang, is important because economists are banking on the second-biggest economy to drive growth. And hopes are pinned on the possibility that Chinese consumers will start to play the free-spending role that previously belonged to consumers in the US and many other economies, including South Africa.

Consumption drives global trade and creates wealth; but when it is funded largely by debt it becomes unsustainable. And here lies the catch.

One of the problems with the pre-crisis global economy was that consumers in the US spent too much, while those in China spent too little. This created imbalances with the US, and countries like South Africa, running big deficits on their trade accounts with the rest of the world, while China ran a very big surplus.

The situation became unsustainable when the US Federal Reserve started hiking interest rates in 2006, and deeply indebted US consumers had to abandon the spending habits of a lifetime. The situation was worsened by the recession, starting in the US at the end of 2007, that put large numbers of people out of work.

US interest rates have since fallen close to zero and the country has started to show signs of sustainable growth. But there has been a shift in the way US consumers behave. Recent history, including the demise of banks which had been household names, has made them cautious.

Consumers in Europe were caught up in the financial slipstream, following the US into recession. The region is not emerging from recession; some countries are showing signs of contraction. And in Japan, which has been a low growth zone for more than two decades, saving is a greater priority than in the West.

This has consequences for China. The country’s long run of double-digit economic growth was fuelled by its exports. With export markets shrinking, the Chinese authorities had to look elsewhere. And they suddenly perceived the value of domestic consumption to sustain economic growth.

They have started to encourage people to spend. But the markets have already been at work. Huang, the chief economist for emerging Asia at Barclays Capital, believes “changes in both the labour and capital markets are positively impacting on consumption”. The changes he refers to include rising wages and interest income.

In the US consumption grew from about 62 percent of gross domestic product (GDP) in the 1960s to over 70 percent now, according to the Pacific Investment Management Company website. In South Africa it is normally over 60 percent – 61 percent in 2007 – but in the third quarter of last year it had fallen to about 57 percent.

In China, official figures have consumption declining from 62 percent of GDP in 2000 to 47 percent in 2010. But Huang believes the figures are understated. He says the consumption share of GDP has been consistently understated by an average of 3.1 percentage points over the past decade.

He argues that household consumption data, derived from household surveys, do not tie up with growth in retail sales: the latter grew much faster. This points to an under-reporting of household income – in which case consumption and consumption growth rates could have been under-reported, says Huang.