Reluctant Chinese Consumers

Businessweek reports that the Chinese government is concerned about the fiscal conservatism being demonstrated by its citizens. The Chinese have one of the highest savings rates in the world. Most people are socking away as much as 40% of their income each year. And the trends going forward don't look good. The share of GDP soaked up by private consumption is only 40%. This represents a fall from 48% as recently as 2000. To put this figure in perspective, US consumers spent 8 times as much on consumption goods even though there are only one-fourth as many Americans.

It might seem to some observers that saving a lot of money is really a good thing. And it certainly can be. The US savings rate has been hovering near zero and in fact gone negative for several years now. The problem is that only so much investment can be done at reasonable levels of profitability at any given time. In real terms, this means that every additional dollar saved goes into a slightly worse investment, because all the best investments get taken first. The cost of saving such a high percentage of income is ultimately personal privation. Foreign businesses have been trying to crack the China market for decades with little success. One reason is that the Chinese are simply much more price conscious than other consumers. By only purchasing a few, very low cost goods, the Chinese limit the marketplace by not rewarding manufacturers for catering to them.

The eternally optimistic in the world economic community envision a day when a great Chinese middle class finally starts spending and touches off a tremendous global bull market. And while continued economic growth on the level of 10% per annum makes such an eventuality much more likely, the sad truth is that a day like that is still far off in the future. For all the good press that China has been able to get in the media, the Chinese middle class only includes about 25 million people. Out of a total population well over 1 billion, it is clear that such a small minority is unlikely to move global markets anytime soon.

The real tragedy of weak Chinese consumer spending is that the quality of life of the average person in China is much lower than it could be. Most urban residents don't own cars and despite the best efforts of automakers, that won't be changing soon either.

The Chinese economic miracle is a wondrous thing, but it could certainly be a much more wonderful thing if it benefited the workers who have made it happen.