China's consumer success story still has a long way to go
After decades of infrastructure spending, the mainland must focus on the consumer sector
The new Chinese technology companies are benefiting from investor bets that they can profit from the country's expanding consumer sector and grow quickly even with less state help.
Bloomberg in New York
SCMP, June 10
T he New Yorker magazine once said it all in a graphic on its front cover. Entitled "View of the World from 9th Ave", it shows 9th Ave in all its busy detail.
Further out is a watery bit marked Hudson River, further yet Jersey, then a yellow expanse, another watery bit marked Pacific Ocean, and two blobs in the far distance marked China and Russia.
I remember the China consumer story emerging more than 20 years ago and being quite a winner for a period. China's big need since the 1940s, it says, was to build the industrial infrastructure on which to base future wealth and, quite obviously, idle, frivolous spending must take second place while this is being done.
But once basic infrastructure demands have been met, there is room for a more relaxed approach and the authorities will find consumer spending also contributes to growth. China will then see a paradigm shift to people enjoying the fruits of their labours.
And that time, says the story, is now! So jump in the market with both feet and buy them consumer plays that are just begging for you to own. Hit it while it's hot, baby, and we got just the line of stocks you want.
I remember someone telling me recently that with modern communications, it takes less than a tenth of a second to send a message to New York.
Yeah, sure. How come this one took more than 20 years to get there then?
And are New Yorkers really as out of touch with the rest of the world as that magazine cover suggests? Do they really think a China angle is enough to make gold out of the dross of these so-called e-commerce outsourcing solutions platforms that clobbered them over the head in the internet bubble of 2001?
Well, apparently this is indeed what they think. China internet stocks with a consumer angle are all the rage in listings in New York just now.
The chart should put things in perspective. Household consumption expenditure in China accounts for only 36 per cent of gross domestic product. This is only a smidgen above historic record lows. The ratio is almost twice as high in the US.
Yes, it is true that developing economies need to put proportionally more of their money into infrastructure development but in China it has long been excessively done with fixed capital formation now at 48 per cent of GDP. The equivalent in the US is 19.5 per cent.
Nor is there any indication of a reversal in these trends. In fact, the signs all point the opposite way. Just this week, for instance, Premier Li Keqiang railed at provincial governors for not meeting their growth targets.
They will undoubtedly respond as they usually do. This is not by pushing consumers into shops. They cannot do it. Their stock answer is instead to pour more concrete by speeding up infrastructure projects.
Meanwhile, there are signs everywhere of a slowdown in the property market and nothing saps consumer confidence quite like a sinking market value of the biggest family asset. The household consumption ratio is headed even lower.
I have seen more than one investment analyst wreck his name with clients by over-touting the China consumer story. How it warms the heart to know that New York's comeuppance is now coming up on this one.