Learn Mandarin online - A Chinese take on the Goldilocks story

BIZCHINA / Weekly Roundup

A Chinese take on the Goldilocks story

By Glenn Maguire (China Daily)
Updated: 2007-06-20 11:19

Key structural supports remain to the high investment growth model. The
central and western provinces have not shared in the same economic
miracle as the coastal provinces. With accelerated development,
investment is often the easiest method to boost growth in inland areas
with largely rural workers. Moreover, the government's aim is to
stabilize investment growth, not bring it to a halt.

Though consumption strengthened throughout 2006 we remain cautious on the
outlook and do not expect a tidal wave of consumer spending to come
rolling in any time soon, as many are forecasting.

We are increasingly concerned by the growing use of the term "middle
class" in analysis of household spending in China. It is a term that has
little relevance to the Chinese economy and the social model implied by
it simply does not exist in China. Most spending in China is very
different from spending in developed countries - the bulk of consumer
spending is just above subsistence spending. The median income in the
rich coastal provinces is $5,000, whereas outside Shanghai and Beijing
the median household income is closer to $3,000, and just $1,500 per
family for all of China.

Given the extraordinarily high level of savings, it should come as no
surprise that the bulk of spending is subsistence spending. The rapid
development of an affluent middle class still remains a long way away.
The median household income of $45,000 in the US, which underpins the US
consumer, would represent an extraordinary degree of wealth in China.

Related readings:
Investment growth still on fast track in May
Four factors bolster China's economic growth
More macro control to avoid overheating
GDP forecasts revised after strong start

Moreover, one of the major drivers of consumption in developed economies
has been the ability of households to finance consumption through credit,
or debt. This is a dynamic that is simply not present in the Chinese
economy. Whereas the US consumer is able to spend more than his or her
income through the use of sophisticated credit markets, this
institutional framework has not developed in China.

Even if it were available it is questionable how many households would
actually avail themselves of debt. Chinese households save nearly 40
percent of their income, given the lack of a government-funded social
security net. The creation of a deep social security net will take
decades to develop and will largely have to be funded by higher personal
tax payments.

China's vast population will one day represent a vast consumer base. At
this time, however, the number of people on incomes high enough to be
able to afford anything other than subsistence spending is quite small.

It could well be that the Chinese policymakers continue to strike the
correct policy balance and the net effect on both the Chinese economy and
the global economy is a continuation of the Goldilocks Effect. That is,
not too hot, not too cold, just right.

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