beyondbrics

The Chinese might not have the freedom to get involved in politics. But the ruling communist party has given its subjects one freedom while opening the economy to the world since 1979, and especially since China joined the WTO in 2000 – that’s the freedom to consume.

The stories about the booming Chinese consumer market strike a discordant note on one level. After all, the dominant global political debate about the Chinese economy is about how the country is a chronic under-consumer.

And yet, a day rarely goes by without an announcement by a western consumer company putting the China market at the front and centre of its future plans. Levi Strauss, the iconic US jeans company, launched a new global brand in Shanghai in mid-August, the first time the company said it had done so outside of the US.

As Robert Reich laid out in a Huffington Post blog, China continues to grow its productive capacity much faster than its rate of consumption.

Reich’s blog displays the ignorance of someone who doesn’t seem to have travelled far into China in recent years. His comment that ordinary Chinese cannot afford the mobile phones that their workers assemble for export to the rest of the world could be disproven by a quick visit to almost anywhere in the country, rich or poor, where everyone seems to be wielding a device. But his broader point holds. As a percentage of economic output, Chinese consumption is low and falling – it is just under 40 per cent of GDP, compared to over 70 per cent in the US – largely because household incomes in China are so paltry. Aside from the growing ranks of billionaires, it is the state and state companies that have got rich from China’s boom.

As my recent book on the communist party noted the country’s political leaders could bolster their legitimacy by giving their citizens a better deal. But that would mean taking on the many vested interests – big and politically well-connected state companies, for starters – that benefit from the present political set-up.

Such a move would be risky, because it would mean devolving power from the state to the grassroots, with unknown political ramifications.

Top Chinese leaders have been saying for nearly a decade that China should change its growth model away from an over-reliance on investment and consumption towards stronger domestic demand. But implementing the policy has been problematic for numerous reasons.

Like every government, Beijing has trouble pushing through difficult reforms. The big state companies, which were meant to begin paying real dividends to the government, have fought the measure for years.

The export sector has resisted a solid appreciation of the currency. The cheap cost of capital and industrial inputs, such as electricity, continues to provide incentives for investment.

As in most industrialised countries, the global financial crisis has also been important in delaying change. China launched a massive stimulus program in late 2008. As a result, in 2009, investment was responsible for about 80 to 90 per cent of economic output, exactly the opposite of what the government wants to achieve in the long-term.

China is so big that both assertions – about over- and under-consumption – can be true. With the industrialised world in a slump, the country and its 1.3bn population still represents the best global opportunity for multinationals that need to sell more of their goods. Equally, the expansion of productive capacity can still outsprint rising consumption if it continues to grow at a faster rate than GDP.

In short, warns Wang Tao, the chief China economist at UBS, don’t hold your breath for radical change in the China model. “China is in the early stage of changing its economic growth model and many structural reforms will take time and strong political determination,” she said in a research note. “In all, real consumption can still grow at 8-10 per cent a year, in line with or slightly faster than real income growth. Do not expect China’s trade surplus to disappear quickly, or to rebound back to 8-10 per cent of GDP in the heydays.”

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