Chinese consumers shall chart country’s economic course

By Stephen S. Roach Source:Global Times Published: 2013-7-31 20:43:01

Illustration: Liu Rui/GT

Illustration: Liu Rui/GT

There is a broad agreement on the need to draw on consumers as a new and sustainable source of economic growth in China.

The newly installed Chinese leadership is committed to a structural reform agenda that is framed around this strategic goal. And there is a strong consensus among experts outside of China endorsing such a rebalancing.

The argument on strategy is over - the challenge now centers on implementation and tactics.

China's pro-consumption strategy contains many moving parts that can basically be grouped into two major objectives - boosting personal income and raising the propensity to spend that newfound income.

Disposable personal income was only about 45 percent of Chinese GDP in 2011 - below the 50 percent share recorded in 2002 and far short of the 77 percent portion in the consumer-led US economy.

Over time, the initiatives noted above could collectively boost China's take-home income share into the upper 50 percent range - a welcome development for a nascent consumer sector.

Yet it's not enough for China just to boost personal income levels. A rapidly aging one-child society is understandably fearful of a financially insecure future. Those fears are well grounded in a weak social safety net.

While China has been very successful in expanding the enrollment in its national social security and healthcare systems over the past decade, it has lagged in providing the requisite funding levels and portability for these plans.

Consequently, confidence in the adequacy of future benefit streams is shaky, at best - prompting a bias toward fear-driven, precautionary saving by Chinese families. Largely as a result, China's household saving rate surged from 11 percent in 1986 to approximately 31 percent in 2009.

It follows that asset injections into Chinese safety net programs, together with reform of the hukou, or household registration system, would go a long way toward reducing the wedge between personal income generation and discretionary spending and in converting precautionary saving into consumer demand.

While these broad reform initiatives are necessary to put the macro building blocks in place for the Chinese consumers, they may not be sufficient to provide an immediate uplift to personal consumption.

It usually takes a spark to transform a glacial structural transformation into something more dynamic.

In the US, for example, the post-WWII release of pent-up demand - consumption that was deferred during the Great Depression as well as during the war - provided just such an impetus. A similar catalyst may well be needed in China.

The Internet might be that spark. China's surging Internet usage has been well documented - an estimated 564 million users at the end of 2012, which is more than a fourfold increase in just six years.

And with only 42 percent of the population connected, there is plenty of room for further expansion.

Moreover, more than half of China's Internet users are regularly on Weibo, where the online experience is far more active and time-consuming than it is with casual surfing.

Take this a few steps further. Online activity encourages a sharing of tastes, trends, and lifestyle habits.

The assimilation of this knowledge, in the form of the collective tastes and preferences of a rapidly expanding Internet user community, has the potential to bring the national norms of emerging Chinese consumers into much sharper focus than would have been the case in the days before the Internet.

For example, young people in an up-and-coming southwestern city like Chengdu in Sichuan Province now have a clear sense of what their contemporaries are buying and wearing in wealthy coastal cities like Shanghai and Shenzhen. The same may even be true of their parents.

In that important respect, the new tools of the Internet can bring to life the new norms of a national consumer culture, norms that have long been missing in China.

Yes, the Internet has its downside - it can be a medium of extremism and cyber espionage. But the power of Internet-enabled platforms gives a fragmented China something it never had before - a network.

And it's a network that is tailor-made to enable the development of the Chinese consumers.

There is an important serendipitous aspect to this development. It coincides with a strategic focus on the macro building blocks of consumer demand as identified in China's 12th Five-Year Plan (2011-15).

The combination is what is so intriguing. It brings a new and powerful technology into close alignment with an agenda of structural reform.

For a nation with a nascent consumer culture, Internet-enabled connectivity could well be the proverbial catalyst that transforms structural change into action. The Internet might just be the big bang of China's consumer-led rebalancing.

The author is a faculty member at Yale University and former chairman of Morgan Stanley Asia.

Posted in: Viewpoint

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