Consumption revolution a long way off in China
with Jake van der Kamp
'It is the end of the processing trade, but the beginning of the consumption revolution.'
Thomas Chan Man-hung
HK Polytechnic University
Here is a tale of two countries, which does not seem to make sense. From the first chart you can see that personal consumption expenditure in the United States is now the equivalent of more than 70 per cent of gross domestic product, the highest this figure has ever been. Americans do nothing with their money but run down to the nearest big box store and throw it all away on 'stuff'.
In China, by contrast, household consumption expenditure, the closest equivalent, has now fallen to 35.1 per cent of gross domestic product, the lowest this figure has ever been. The Chinese do nothing with their money but have it taken away from them by their government for the construction of high-profile infrastructure projects that have gone far beyond need.
Yet, says the second chart, retail sales growth in China is far stronger than in the US and has long been. Over the past 10 years China has averaged a year-on-year growth rate of 16 per cent in retail sales, while in the US this figure has averaged less than 3 per cent.
Well, you say, isn't it about time? Do Americans think they can borrow other people's money to spend forever? Must Chinese slave forever and never see the rewards? The trends of this second chart must by now show us the way to the future in consumption patterns.
It's the story I have heard from almost every investment manager who puts any money in China. Forget those infrastructure and export plays, it's time for the consumer revolution. China is the next big consumer market and those who get in on ground floor are going to enjoy a wonderful ride up.
The trouble is that I have heard this line for four or five years now and they are still talking as if it lies in the future. Some consumer plays have done very nicely, but the big money across the border has still been invested predominantly in old plays like construction and infrastructure. When will the future finally be with us? Here is a suggestion to consider; it won't.
This is not to say that there can be no thriving consumer market. Anyone comparing a Chinese city today with the same one 25 years ago would tell you the consumption revolution is a fact of life. The contrast is enormous. But so is the contrast between a present personal consumption expenditure of US$33,000 per head in the US and US$1,300 in China.
Closing a gap this big is a very big job indeed. And the leaders of no command economy have ever wanted to do it. They don't see the fulfilment of their lives in arrays of bottles of shampoo, hair conditioner and other lotions in every washroom cabinet in the land.
They used to think they would make their mark with big statues and palaces. Now they do it with big highways, bridges and dams. Oh yes, and big athletic events.
But letting individuals decide on their own what they personally want to do with their money? Never!
In my view, a consumption revolution of the sort being contemplated here needs a big change in more than consumption and I have seen nothing to suggest that the leadership's long-standing fascination with pouring concrete has changed in any way.
A consumer society is a democratic society. You may argue whether you really want either, but you cannot pick one and scorn the other. China is just not there yet.
And that says there is not much hope for the processing plants in the Pearl River Delta. A stronger yuan and rising wages are squeezing them out of business, but no big surge in consumer demand will come in time to save them.