A life less ordinary

Like many people, I view China as a place where a lot of ‘stuff’ is made.  I admit ignorance at  never having thought about what Chinese people buy themselves.  I was surprised to find out that Chinese people don’t actually buy much of their own stuff.  Instead, they prefer to save their RMB, putting cash away to save for a rainy day.

Now, you’d likely think that a Communist country would have a significant social safety net.  In fact, they don’t.  Migrant workers have virtually no social safety net while they are working, away from their home village.

What this means is that almost 65% of income is saved against potential future needs, leaving only 35% to be spent.  This level of savings is virtually the inverse of developed economies, where up to 65% of income is spent on basic consumption.

The free-spending ways of foreigners (notably the EU and the US – China’s two biggest trading partners) is likely coming to an end, as individuals start to repay their numerous debts and lenders tighten access to credit.  The change in consumption by the EU and US poses a serious problem for China as there is nobody else who can pick up the slack and keep Chinese factory workers employed.

With dropping exports, China will have reduced employment which leads to the dangerous potential for political unrest.  It is clear that the Communist party will hang onto power with every available trick, so a range of responses is expected to compensate for the drop in exports.  The most notable response is the desire of Chinese leaders to increase domestic consumption.  Essentially, China will sell Chinese goods to Chinese.  How radical!

China will promote domestic consumption through the following efforts:

• Subsidizing consumption – an example has been the recent incentives rolled out for the purchase of ‘white goods’.  Expect more incentives, such as automobiles and apartments in tier 2 and tier 3 cities;
• Providing a social safety net.  The government can loosen the robust savings rate by providing social services.  Expect to see health benefits and old age support start to roll-out over the coming decade.  As these policies reduce future cash needs, expect savings to drop as Chinese buy tv’s, stereo’s, automobiles and ultimately services!
• Appreciating the RMB.  Currently, a low RMB means that commodities and imports are very costly.  As the RMB appreciates, the cost goods will drop and demand will rise.

Ultimately, while Chinese officials are hoping for a rapid increase in internal consumption, I believe that old habits die hard, and internal consumption within China will appreciate modestly in the coming decades.

I recently went to China to research the Chinese economy.    I thought I would describe some of the insights I had from the trip and my discussions with business leaders while there.

I’ll start with the overall economic outlook for China.  In this first post I’ll focus on urbanization

Many of us have seen the recent property boom in the West and the effect on employment.  Building homes is well-paid, relatively stable employment.  Building homes also has a huge knock-on effect throughout the economy, as new homes need new furniture, roads, shops and subways.  In North America, homes in themselves created a tremendous economic boom in both Canada and the USA.

Looking at China, they are at the start of urbanization.  Assuming they follow others countries rates of urbanization,  they have hundreds of millions of people who are still to leave the countryside to live in cities.  This represents tremendous future economic growth.  There are currently over 160 million person cities in China, and this number will rise as urbanization takes hold.  I see a tremendous stimulus to the Chinese economy simply through the natural evolution of a rural to an urban society.

What this implies to me is that I expect a significant minimum level of economic growth simply due to urbanization.  Opportunity is in the cities and I expect Chinese to continue to move to cities and fuel growth.

What I don’t know is the rate of economic growth due to urbanization and the spillover effects.  Specifically, is the economic growth from urbanization going to be enough to keep the Chinese people happy and the political system in China stable?  Will the investment in urbanization lead to over-investment in infrastructure (such as the rumoured high-speed train network extending into Western China)?  The stimulus for moving to the cities is jobs, which are often tied to exports – will there continue to be growing numbers of jobs to draw rural dwellers to cities?  Finally, property is typically susceptible to boom and busts – will this affect China and what are the results of a potential bust?

It is difficult to answer these questions, and I’ll leave them to others to consider.

In coming posts I’ll discuss:

1. China’s transition from an export economy to one focused on internal demand
2. China’s goal of moving up the value chain from a manufacturing economy to a service economy
3. The unique urban environment due to a lack of consumption
4. Complex relationships between state and business and potential for regional conflict
5. My view on moving manufacturing to the Western provinces via high-speed rail network
6. China business moving to the West
7. Challenges for Western companies moving to China
8. The effect of a bust on the Chinese population after 2+ decades of a boom
9. The best looking bar I’ve ever been to