August 13
It used to be: "The Chinese economy is growing at 10%!" Now it is,
"The Chinese consumer is going to rescue us". How convenient!
More groupthink by the NATO establishment which has stars in its eyes
about China. As Claude mentioned elsewhere, there are lots of people
who simply dont believe China can fail. And most of them are not
Chinese! This is the kind of extraordinary propaganda success they
have had. Indian nationalists need to learn from the Chinese about the
art of fooling all the people all the time.
From the Economist Intelligence Unit.
Is consumption the next big thing?
COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
With the Chinese economy's chances of achieving a "soft landing" so
much in the news, economists and executives from Beijing to Boston are
closely watching all-important investment growth for signs of a
cool-down. But as the effects of administrative measures to restrain
investment become more visible, and the overall economy slows, a new
force--the revival of private consumption--is likely to be viewed
increasingly as the country's next great driver of economic growth.
The question is, can it deliver?
The short answer is yes, but only to a limited extent. Investment is
already slowing and will undoubtedly slow further, either because the
authorities' measures to engineer a soft landing succeed--which the
Economist Intelligence Unit believes is most likely--or because
continued rapid growth will eventually make a sharp correction or
"hard landing" inevitable. Assuming a soft landing, consumer activity
will grow more rapidly and begin to make a slightly bigger
contribution to GDP growth in the next few years. The contribution
from fixed investment, meanwhile, will fall sharply, to under 4
percentage points from 2005--less than half last year's estimated
8-point contribution.
However, while consumer spending will take up some of the slack left
by slowing investment, its impact will remain relatively modest.
Private consumption will certainly not be the same dynamic force as
fixed investment has been over the past three to four years. We
forecast that, with investment slowing, real GDP growth in 2005-07
will average around 8%, relatively paltry by China's recent standards.
This is not entirely bad news, as the authorities want economic growth
to slow to a more sustainable level. And part of the expected rise in
private consumption will, in any case, be a natural rebound after
three sluggish (again, only by China's sizzling standards of growth)
years. Private consumption is thought to have grown by an annual
average of just 6.3% in 2001-03, the slowest rate since the three-year
economic downturn that accompanied the political turmoil of 1989.
The relative weakness of consumption growth in the last three years
might itself cause some surprise. After all, haven't foreign
multinational companies been becoming increasingly excited about
China's emergent domestic market? This cannot be attributed merely to
the China hype that has often afflicted foreign firms. Fairly reliable
statistics indicate a surge in consumer sales of electronics goods and
cars in recent years, and visitors to China will attest that urban
high streets and shopping malls are anything but sleepy.
A nation of savers
However, an important factor has restrained--and will continue to
restrain--private consumption, despite rising household incomes, and
that is the growth of personal savings. China's urban residents are
indeed becoming eager consumers, but official statistics suggest they
are becoming even more eager savers. According to the results of
China's household survey (which has a sample size of more than
40,000), real urban per-capita incomes rose by an average of 10.8% a
year in 1999-2003. But the same statistics suggest that in recent
years the propensity to consume in towns and cities has been falling
rapidly. Household survey figures, which cover expenditure as well as
income per head, indicate that the savings ratio in urban areas has
risen from around 20% in 1998 to nearer 30%.
China's household survey statistics need to be treated with a degree
of caution, but even so the trend of a rising savings ratio makes
intuitive sense. In recent years the "iron rice bowl" welfare system
provided to workers in state-owned entities has broken down. This is
partly because the majority of workers are no longer working for
state-owned enterprises (SOEs): the non-state sector now employs
almost 75% of urban workers, up from just 30% in the early 1980s. It
is also because SOEs themselves, under pressure to operate more like
profit-seeking companies, have been seeking to shed their
social-welfare responsibilities. The result? Workers themselves now
have to buy their own housing, and make much more financial provision
for education and healthcare.
A second factor pushing up savings rates in urban areas has been
rising unemployment. Since 1998 around 30m workers have been laid-off
from SOEs. Official figures show unemployment in towns and cities has
risen from 3% in 1996 to 4.3% now, but in reality the unemployment
rate is likely to be much higher still.
Beneficially for private consumption growth, savings rates will not
trend upwards indefinitely, which should ensure that after a certain
point consumers will feel more comfortable increasing their
expenditure on luxuries and discretionary items. In addition, it is
possible that urban unemployment will ease as the government's
increasingly vigorous attempts to encourage the growth of the private
sector, particularly small and medium-sized enterprises, raise the
rate of job creation. This again will support more robust consumption
growth.
Despite this, it is inconceivable that the iron rice bowl will make a
comeback. Urban residents will continue to have to save to meet future
possible welfare commitments. Thus, while the Economist Intelligence
Unit does expect some levelling out of the savings ratio in urban
areas in the coming years, we are not expecting an outright fall.
Counting on the countryside
In this case, should China's retailers--and macroeconomic planners--be
placing their hopes on the rural consumer? In the late 1990s the rural
economy in China slumped, with annual growth in rural per-capita
incomes (again using data from the household survey) sliding from
double-digit rates in 1995-96 to nearly zero in 1998. Farmers and
their families have also had to deal with the collapse of a rural
welfare provision system that was already skeletal, and the increasing
avarice of cash-starved local governments and officials. Put simply,
rural residents have not had much money, and they have had good reason
to hold on to the small amounts they have managed to accumulate.
This situation is changing. Since 2000, and even more so following the
accession of a new leadership in 2002-03, the government has become
increasingly worried about the depressed state of the agricultural
sector. This concern has led to the launch of a whole raft of policies
aimed at reviving the rural economy. The central government is trying
to reduce the tax burden facing farmers, their land rights have been
strengthened, attempts have been made to improve the provision of
health and education facilities in rural areas, and the government has
begun for the first time to subsidise directly producers of grain.
All of these changes should boost rural private consumption in the
long term. In the short term, a different factor--surging rural
product prices- -is already having a beneficial effect. In both the
final quarter of 2003 and the first quarter of 2004 rural income
growth outpaced that in towns and cities. While the government's
policy initiatives may have played some part in this development, the
main cause has been higher grain prices. According to consumer price
index (CPI) data, grain prices began to rise in October 2003, and
since March 2004 have been increasing by more than 30% year on year.
This has led to a sharp increase in the income farmers have been able
to generate through the sale of agricultural goods (revenue from which
still accounts for 20-25% of total household income in rural areas).
Any rise in rural incomes is potentially very significant for total
nationwide consumption. Urbanisation has been proceeding apace in
recent years, but most people in China still live in the countryside.
As a result, despite having much lower incomes per head, rural
dwellers were responsible for over two-fifths of China's nationwide
nominal private consumption in 2003. Indeed, every 1-percentage-point
increase in the growth of real per-capita rural incomes would raise
the growth rate of nationwide private consumption by 30-40 basis
points.
Outlook
So what will happen to rural incomes? The revival of the rural economy
looks like a structural rather than a cyclical phenomenon. The
stagnant year of 1998 seems to have marked the nadir of the downturn
in the countryside, and rural income growth has strengthened fairly
consistently since then. With the serious attention the government is
now paying to the problems in the countryside, it can be expected that
this trend will continue in the next few years.
Having said this, the sharp price-induced rise in incomes experienced
this year is likely to prove temporary. While no doubt pleased to see
rural incomes rising, the government is worried both about the
consequences and cause of the upsurge in grain prices: respectively,
wider inflationary pressures and a shortfall in the grain supply, a
development which is troubling for a government that has historically
attached much importance to food self-sufficiency. Given this context,
it should be no surprise that officials are now rushing to encourage
grain production. As a result, while remaining firm, grain prices are
not expected to continue increasing at their current pace.
Government attempts to slow the investment-driven boom at a nationwide
level will also have some negative effect on rural income growth.
Money sent back home by family members temporarily working in cities
has become an increasingly important source of income for rural
communities in recent years. Construction sites are particularly rich
sources of employment for migrant workers, but they were also the
first target of the government's recent tightening drive. Activity in
the property development sector has slowed in recent months.
Overall, the immediate outlook for consumption is for a bounce in both
rural and urban spending. This is because of a low base effect: the
outbreak of Severe Acute Respiratory Syndrome (SARS) in the second
quarter of last year depressed both rural and urban consumption. As
consumers in the countryside spend again, real rural per-capita
consumption is likely to grow by 7% this year, the fastest rate of
growth since 1996. Growth will ease next year but probably only to a
still-robust 6.5%.
Forecasting growth in urban areas is trickier because the historical
trend is less clearly defined. SARS temporarily depressed incomes in
2003, but statistics suggest the year before was also an anomaly,
although this was because of excess on the upside rather than the
downside. Still, given the overall context it would be reasonable to
expect urban consumption per head to grow by 8% in 2004-05.
Being based on household survey data rather than national accounts,
none of these figures are directly comparable with our GDP forecast
for private consumption growth. The general trends do suggest that
private consumption growth will on average be higher in 2004-05 than
it has been in recent years. But they do not indicate that private
consumption is about to boom, and nor by consequence do they indicate
that China's consumers can offset fully the expected sharp slowdown in
growth of capital expenditure. Stronger private consumption will only
soften, not prevent, China's impending economic slowdown.
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