Sustainable 21st century growth will be achieved if, over time, America increases savings and long-term investment and China reduces saving rates and stimulates consumer demand.
In absolute and aggregate terms, the PRC's consumer economy has made Herculean strides over the past decade. The "new" middle class now counts more than 125 million individuals. Passenger auto sales, in units, have surpassed America's. The Middle Kingdom has recently surpassed Japan to become the world's second-largest market of luxury goods. Mobile phone subscriptions, over 700 million strong, penetrate lower-tier cities and rural fringe markets. Anta, a mass market sports shoe brand, has quintupled revenue in five years, up from 1.2 billion RMB in 2005 to almost 6 billion RMB last year.
Chinese consumption has emerged as a force to be reckoned with. When the government succeeds in further unleashing personal spending, a paradigm shift that has just begun, the PRC will become an even more fundamental driver of global demand.
Structural Impediments to Global Rebalancing
But it will be a long road to Rome. Over the next decade, Chinese consumers will not save the world; they can not make up for a sharp pullback in U.S. consumption. The Chinese, poor by global standards, are extremely cautious, ruthlessly price conscious and risk averse. This tendency, reflected in a bargaining impulse that approaches blood sport, is underpinned by: a) contemporary government policy and b) ancient cultural imperatives - i.e., assumptions regarding the relationship between society and individual. The relevance of the latter is indicated by persistently high savings rates even in "developed" Chinese societies such as Hong Kong, Singapore and Taiwan.
On the Mainland, factors militating against rapid reorientation of domestic demand are well understood. The Chinese economy is fueled by investment in infrastructure and capital; as a result, individual incomes are rising at a much lower rate versus the total economy. Shareholder rights are notoriously weak, sometimes non-existent. Welfare and health care "safety nets" remain in tatters. Reform has been stunted by the central government's inability to inefficiently allocate resources at the municipal and provincial levels, often due to corruption and aggressive protection of local or factional interests. Private rural land ownership, perhaps the greatest opportunity to liberate mass market incomes, remains stranded a Twilight Zone of political incorrectness.
Cultural Factors that Inhibit Spending
"Culture" is another factor -- less appreciated, non-quantifiable but no less fundamental - that makes wallets difficult to pry open. .
Everything that distinguishes China from the West - reverence of strong authority, a social contract that eschews outright rebellion, the primacy of the clan at the expense of U.S.-fangled "individualism," glorification of hierarchical advancement within a mandated framework, relentless amassing of "face" (i.e., societal acknowledgement) as a defense mechanism against stagnation, outsized-yet-fragile egos, "mine is bigger" neon fixation, arena-sized lobby fortresses that project Power - can be boiled down to a unifying belief: safety first, then progress.
Across millennia, all strands of indigenous Chinese philosophy - Daoism, Confucianism, Legalism -- have reinforced the imperative of stability as the foundation of advancement. Driven by a pervasive belief that "security" - on physical, societal and financial levels - is ephemeral, the Han worldview is an anxious worldview. For thousands of years, the Chinese have been taught that imperial authority is required to ward off chaos. Confucianism mandated strict adherence to a social contract in which: a) the clan, not the individual, is the basic building block of society and b) upward mobility is tantamount to mastery of "the rules."
As a result, China never developed an institutional framework that defends the interests of individuals subordinated to the state. Today, a co-dependent relationship between a brittle, authoritarian central government and jittery populace persists, reinforced by quintessentially Chinese characteristics: a judiciary branch that must advance Party interests, non-transparent eminent domain, pervasive corruption at all levels of society and a lack of checks and balances within the Party. Age-old anxiety still runs deep.
Polarized Impulses: Protect vs. Project
To guard against threats, real or imagined, polarized impulses emerge. There remains an acute tension between bold ambition and risk-averse regimentation.
This conflict, at once dynamic and restrictive, also explains the topography of China's consumer landscape. It explains the omnipresent tug-of-war between yin and yang urges: the first is conservative, penny-pinching, credit-averse, future-focused and "protective"; the second is ego-gratifying, dynamic, status-seeking and "projective." It explains why the vast majority of these transactions are made in cash, not to mention ultra-low prices privately-consumed categories such as appliances, furniture and food. But it also explains why "entry level" middle-class families willing to shell out 130% of their year income on a car or $30,000 for a wedding party.
Both corporate marketers and government cadres hoping to stimulate domestic consumption should heed this distinctly Chinese buying dynamic. They must directly address either the "protect" or "project" instinct. The former dominates urban mass market buying, particularly in lower-tier cities. Efforts to spur spending here require epic structural reform, no easy task given the precarious balance that must be struck between "harmony" and "growth."
There are "surgical" ways of quickly triggering demand. Wealthier individuals, still inclined to save for rainy days, can be motivated to spend on goods that enhance ability to project status. Several product purchases are universally considered to be rites of middle class passage. These "show off" items, usually publicly consumed, cover a broad swathe of purchases. The government's 2009 tax break on fuel-efficient cars, for example, resulted in growth of 80%. Luxury goods - from fashion to watches and cosmetics to diamonds -- are bought by the elite and twenty-somethings as "investments" in future success; reduction of import tariffs, now over 33%, would mean a splurge for the ages. Enhancing access to credit for small business owners would also encourage spending. (In a society where land ownership is illegal, a man's company is his Rock of Gibraltar.) So would liberalizing tourism visa policy; in China, you are where you have been.
A few swallows, alas, do not make a summer. As we await a rebalanced Chinese economy, the world must muster the patience of Job.