Susan Whiting, Vice Chair, The Nielsen Company
|SUMMARY: China’s export-driven economy has slowed as a result of the global recession. With a drop in exports and a growing unemployment rate, the Chinese government is urging consumers to spend in order to spur the economy. While various stimulus plans are being investigated, the nation’s success may rely as much on altering cultural dynamics as replacing economic models.|
When China first announced its massive stimulus plan at the end of 2008, it was largely praised both internally and around the world. The four trillion Yuan ($586 billion) package was designed to expand growth 1% for each of the next two years, and help ensure gross domestic product (GDP) would remain above the 8% threshold Chinese leaders have repeatedly said is needed to maintain economic and social stability.
But as its principal trading partners, Europe and the United States, have slipped deeper into recession, China’s export-driven economy continues to slow as well. The nation’s exports in December fell 2.8% from a year earlier, while foreign direct investment—another key economic driver—faded in the final three months of last year.
Just as worrisome is the World Bank’s forecast of 7.5% growth in 2009—though still much better than the International Monetary Fund’s current 5% projection.
Stimulus plan concerns
Since its introduction in November, the plan has come under increased scrutiny. Some observers question the actual amount of the stimulus, noting it includes funds already budgeted in the government’s 2006–2010 plan. Others think it relies too heavily on monies that must be raised by the provinces and private businesses.
|The package includes only a few programs geared toward expanding consumer spending…|
Most important, however, is the fact that the package includes only a few programs geared toward expanding consumer spending. Yet that is crucial to achieve the government’s expressed goal of transforming China’s growth engine from exports to a model based more on domestic demand.
Consumer spending challenges
Efforts to boost domestic consumption face considerable challenges, even in an economy as relatively strong as China’s. At December’s CAIJING Annual Conference in Beijing, hosted by the nation’s leading business and financial magazine—and in which I had the privilege to participate—several prominent economists, academics and government officials shared their perspectives on the issue.
|One factor suppressing consumer spending is declines in both employment and income growth…|
According to Cai Fang, Director of the Institute of Population Studies at the Chinese Academy of Social Science, one factor suppressing consumer spending is what he describes as an “income effect,” which is the direct result of declines in both employment and income growth.
With the drop in exports, China’s manufacturing also has weakened, forcing thousands of factories to close. Nowhere has this been more evident than in provinces like Guangdong, where export growth plunged from 22.3% in 2007 to just 5.6% in 2008, and where it is expected to remain flat throughout this year.
Consequently, it has been reported that close to ten million Chinese migrant laborers are out of work. On top of this, as many as seven million university and college graduates also are seeking employment.
Moreover, even consumers willing to spend may find it difficult, since too few can afford to buy the goods their factories produce principally for export.
Indeed, earlier this year, China announced it had revised its 2007 GDP growth to 13%, thus surpassing Germany as the world’s third largest economy. Yet China’s 1.3 billion residents have a per capita GDP of only about $2,500, compared to the more than $40,000 enjoyed by Germany’s 82 million inhabitants.
Potential growth drivers
To maintain employment levels and sustain income growth, Cai believes China must focus its efforts on various sectors of potential growth. For example, there are opportunities to enhance labor productivity in coastal export businesses—particularly through training and education—while also establishing low-cost manufacturing in parts of Midwest and Western China.
Another possibility is to leverage flexible means such as self-employment, incorporation, and other channels beyond traditional state-owned enterprises.
|Encouraging consumers to spend will require more than just augmenting employment…|
Still, encouraging consumers to spend will require more than just augmenting employment, contends Shen Minggagao, Caijing magazine’s chief economist. China must significantly reform its social programs before more people will part with their money.
Unlike its American counterpart, the average Chinese family saves about 30% of its income, mainly because of China’s frail social safety net. Without support systems like social security or health and unemployment insurance, people must rely on their own resources to pay for a hospital stay or a child’s education.
The way to stimulate consumer demand, notes Shen, is to speed such reforms. In addition, he sees an immediate need to increase Chinese income levels, especially those of low-income groups in both urban and rural areas.
Huang Qifan, Vice Mayor of China’s largest municipality, Chongqing, agrees with the concept of low-income family stipends, along with discounts on purchases of home electrical appliances by rural families. He also thinks changing the personal income tax system could generate aggregate demand among consumers.
A tax deduction or refund on individual mortgage spending, for instance, would help restore property market confidence and increase consumption—as would a special tax refund for those whose incomes depend on exports.
But Zhou Xiaochuan, Governor of the People’s Bank of China, warns that if China only reduces taxes without reducing administrative spending, there will other issues to deal with, including a fiscal deficit.
Instead, he recommends a bundled resolution that provides a progressive percentage tax cut supported by a proportionate reduction in government administrative expenditures.
So far, the government has taken a number of steps in response to these and other recommendations. In January, it announced it would spend an additional 850 billion Yuan ($124 billion) over the next three years to improve health care coverage. It also has lowered the down payment requirement for home purchases from 30% to 20% of a home’s value.
|The nation’s success may rely as much on altering cultural dynamics as replacing economic models…|
A difficult dichotomy
Yet the nation’s success may rely as much on altering cultural dynamics as replacing economic models. China is encouraging its citizens to spend more at a time when consumers in the United States are being admonished to do just the opposite, putting even greater pressure on exports and manufacturing.
In fact, Chinese and American consumers have ostensibly become mirror images of one another. While Chinese families save nearly a third of their incomes, Americans’ personal savings rate has crept near zero for the past several years. It is not surprising then that household consumption represents more than two-thirds of the U. S. economy, compared to slightly more than 35% in China.
Changing that correlation won’t be easy. In 2008, American households accounted for only about 4.5% of the global population, but bought more than $10 trillion worth of the world’s products and services. On the other hand, the four-in-ten people who live in either China or India bought only $3 trillion.
|There are signs that Chinese consumers are open to spending more…|
Nonetheless, there are signs that Chinese consumers are open to the possibility of spending more of their money.
According to Nielsen’s most recent Global Consumer Confidence Survey, nearly three-quarters (72%) of Chinese consumers are optimistic that their country is not in a recession. Accordingly, China’s Consumer Confidence Index (CCI) of 96 has remained relatively stable since 2006, and hovers above the CCI of 84 that is the global average.
More than half (56%) of consumers surveyed are generally optimistic about their personal finances in 2009, though less so (41%) about job prospects. Among those willing to spend their spare cash, most favor leisure-related categories, such as holidays, out-of-home entertainment and new technology—areas in which the government hopes to encourage greater consumption.
For its part, the government too is willing to spend more where necessary. Much like its citizens, it has “money in the bank,” with a budget surplus that exceeded one trillion Yuan in the first half of last year. Recently, it announced it will expand the country’s money supply by 17% next year to spur domestic spending. It hopes to grow 2008 bank lending levels by as much as $14 billion.
Even so, China’s economy has been unable to avoid the “economic tsunami” that has engulfed much of the rest of the world, and its eventual outcome rests on a host of variables both at home and abroad. So far though, it appears to be in position to effectively weather the global economic storm.