The Chinese consumer awakens, driven by double-digit wage rises

In the Tibetan monastery town of Xiahe, Gyelyanjia is visiting for a festival and taking the opportunity to do some shopping.

He has spent 20 yuan ($3) at an electrical appliance shop on a heat-belt, which he can fill with boiling water and strap around his waist to ward off the bitter winter chill on the Himalayan plateau.    

The 66-year-old grins: “I already have a television at home. But I would like a washing machine and a fridge. I hope to buy those next year.”

Timothy Geithner harbours similar hopes. The US Treasury secretary is counting on hundreds of millions of Chinese like Gyelyanjia to spend more and save less.

That way, Chinese factories would produce more for domestic consumption, helping to narrow trade imbalances that are destabilising the global economy.

Chinese consumption is, in fact, strong. It has grown by more than 9% a year, after adjustment for inflation, over the past decade. China overtook the US in 2009 as the world’s leading automobile market.

The real-estate market is on fire, swelling demand for appliances and furniture. China is No. 2 in sales of luxury goods.

Spending might be sturdy in China, but investment has been off the charts.  As a result, consumption was just 35.6% of GDP in 2009, from 46.1% a decade earlier — and that was helped by a massive governme stimulus to counter the global financial crisis.

The task for China’s policymakers is to lift that proportion by boosting wages, speeding up urbanisation and building a social safety net so people do not need to save so much for a rainy day.

“Consumption will be the story of the next five to 10 years, and because we’re talking about a fifth of humanity, it will have a huge impact on global business,” said David Gosset, director of the Euro-China Center for International and Business Relations at the China Europe International Business School in Shanghai.       

Still, he doubted China’s consumption share would reach the roughly 60% rate of the European Union, let alone the 70% rate of the United States. “The Chinese will never consume as we do in the West, especially in the US.”

The opportunities for retailers are nevertheless mouth-watering, if they can adapt their sales methods to thousands of fast-growing towns across China where budgets and tastes are a world apart from the bright lights of Beijing and Shanghai.

Patrick Kung, Greater China chairman for Koninklijke Philips Electronics NV, sees huge growth in the coming decade in what he calls China’s “emerging markets” — lower-tier towns and the countryside — while coastal cities will gradually become saturated.

“A smart company will be proactively investing and looking how to tap those markets,” Kung told a conference organised by the EU Chamber of Commerce in Beijing.

Scenting the potential profits, many multinationals are doing exactly that.

General Motors, the biggest overseas automaker in China, is busy rolling out affordable models aimed at smaller cities that it says could account for 60% of its business within five years.

“Those big coastal cities are rapidly becoming less than a quarter of our business and the real growth is in what we call tier-3, tier-4 cities,” Terry Johnsson, vice president of GM’s China operations, said.

German sports goods company Adidas AG plans to open more than 2,500 stores in smaller Chinese cities by 2015.

Foreign and domestic retailers in sectors from hotels to instant noodles are reporting surging sales from lower-tier cities, which are benefiting from a wave of corporate investment and government measures to support consumption, according to Jing Ulrich, chairman of China equities and commodities at J P Morgan.

“If you’re not doing well, it’s because you have an execution problem,” she said. “I think in the next 3-5 years we’re going to see the interior really taking over as a major growth driver for China’s overall economy.”

China has enjoyed three decades of double-digit GDP growth by favouring investment over consumption and export-orientated manufacturing over domestic services.

Heavy industry has benefited from a seemingly bottomless pit of cheap labour; cheap and plentiful credit supplied by state-owned banks; cheap land provided by local authorities keen to generate jobs and taxes; cheap utility tariffs; and, last but not least in Washington’s eyes, a cheap exchange rate.

All these factors amount, economists say, to a tax on consumers and a subsidy for producers. Unable to sell all they make at home because incomes are suppressed, manufacturers have to export the surplus — to the chagrin of critics such as Geithner.

One statistic dramatises this imbalance at the heart of China’s economy:  the share of national wealth going to workers as wage income plummeted to 39.7% in 2007 from 53.1% in 1998.    
Seen in that light, it is no wonder consumption has contracted as a share of GDP.  But could China be on the cusp of change?        The National Bureau of Statistics (NBS) yearbook shows wages have surged and accounted for 46.6% of GDP in 2009.