For China bulls, it’s a bear pit out there. Profligate lending to local government investment companies, we are told, means a looming debt crisis. And as for the property market, well, meltdown awaits.
Those of us who think that China can basically grow out of its adolescent difficulties are accused of being na?ve. Forget that the country has a unique political economy and a growth trajectory far removed from the Japan of the 1980s: Economic facts are economic facts. China’s investment binge will cause more than a nasty bout of indigestion, the bears proclaim.
Fortunately, there is one area where bulls and bears can agree: that China’s economy is dangerously lopsided and needs to shift to a more sustainable model. Simply put, the country invests too much and consumes too little. Last year, investment spending accounted for nearly 90% of GDP growth, once you take the negative contribution of net exports into account.
In fact, the consumption numbers are not as desperate as many people presume. Household consumption is growing quite nicely, at roughly the speed of GDP, according to the Rural and Urban Household Survey, the only useful government measure of consumption that we have. If you believe the official retail figures, consumption appears to be growing twice as fast. But these numbers are artificially boosted by government purchases and are a poor indicator of true personal consumption. Anyone who tells you otherwise is probably trying to sell you something.
Genuine consumerism has arrived in urban China, and not just in the obvious places. Domestic leisure and sportswear brands like Anta (2020.HK) and Peak (1968.HK) have reported rapid sales growth in China’s vast hinterland, even in small cities out in the sticks.
But for consumption to take over from investment as an engine of economic growth, China’s 700 million-plus farmers need to be dragged into the modern world.
Recently a number of optimistic reports have claimed that rural consumption is taking off. In the first three months of the year, 16 million household appliances were sold, a five-fold increase on the year before – largely, we are told, thanks to Beijing’s 13% rural subsidy on washing machines, refrigerators and air conditioners.
But take a trip out into the Chinese countryside and farmers seem far less excited by the scheme than the government’s propaganda would have you believe. The numbers tell the story: Average rural income per head is still below US$730, while average personal consumption spending is under US$580 – hardly enough to stiffen flaccid sales. Add in the fact that the average farmer spends two-thirds of that on food, clothing and housing, and it becomes clear why China’s rural masses are not jumping into shops and markets to shore up the country’s consumption-lite economy.
During the May holiday, big domestic appliance makers like Haier (600690.SH, 1169.HK) and Gree (000650.SZ) slashed prices in rural areas in an attempt to lure farmers unimpressed by the subsidies. The fact of the matter is that few farmers spend money on consumer goods unless they need to – until, that is, their washing machine breaks down or they need to buy wedding gifts for their children
China’s economy is in no danger of crashing and burning any time soon, whatever the bears like to say. But it is too early to expect the rural consumer to replace investment as the powerhouse of the country’s economic growth.