Understanding the Chinese Consumer
Will the rise of a Chinese consumer culture affect the country’s growth capabilities?
April 25, 2006
The emergence of the Chinese consumer is likely to draw added impetus in the years immediately ahead.
Chinese policymakers for their part, are moving to shift the mix of economic growth from exports and investment to private consumption.
The stakes of this transition are enormous — for China and the broader global economy. This could well be the defining macroeconomic event of our lifetime.
Unfortunately, we don't know much about the Chinese consumer. Neither does China. The data are sketchy and there is little in the way of a meaningful history of modern-day consumption trends in the world's most populous nation.
In an effort to dig deeper into this issue, I recently stumbled across an article in the Harvard Business Review that was based on a Gallup Poll of China's consumers.
At first, I thought the very concept of a survey in a nation of 1.3 billion people was unfathomable. So I asked the Gallup Organization for a peek under the hood, and they stopped by to brief me on their 2004 tally of the Chinese consumer.
It turns out that they have been conducting comprehensive surveys of Chinese consumer attitudes since 1994.
The latest poll is based on about 3,600 interviews with urban and rural respondents from around the country, selected on the basis of what Gallup calls a "rigorous probability-proportional-to-size sampling design." Another survey is currently in the field, slated for release this fall.
I found the results fascinating. They go a long way in adding granularity to the saga of the Chinese consumer, but they also shed considerable light on some of the nation's most important anomalies.
For starters, the Gallup Poll reveals much about the character of China's emerging consumers — namely, the product-specific shifts in tastes that are now taking hold. Penetration of major household products has increased dramatically over the past decade.
Interestingly enough, Chinese consumption has spread most rapidly into the electronic product categories — especially televisions, phones (fixed and mobile), and computers.
By contrast, with the exception of the microwave oven, increased penetration of more traditional appliances — washing machines, refrigerators and stereos — has lagged.
On that basis, there is good reason to believe that China will attain the status of having the world's largest population of wired consumers over the next few years.
Analyses reckon that China, which leapt into second place in the global marketplace for technology, media and telecom in 2004, should take the lead by 2010, supplanting the United States by a wide margin. This could well be a key differentiating factor of the world's newest consumer.
The Gallup Poll underscores the well-known split of the Chinese consumer into two groups. The contrast between those living in urban and rural locations is extraordinary.
The income gap is especially high — with urban income per household of about $2,950 in 2004 running three times that of rural households at $990. What surprised me, however, was the answer to Gallup's query to Chinese households on what they felt they needed in order to "get by."
Urban workers put the average cost of living about 10% above annual income. For rural locations, the spread of costs over household income was about 17%.
This demonstrates the considerably greater strains on lifestyles for the 57% of the Chinese population — or about 750 million people — still residing in the countryside. Interestingly enough, these results fit quite well with the answer to a related Gallup query on personal saving.
Family dissatisfaction is mounting over the amount they are able to set aside each year. In 2004, fully 68% of all Chinese in the Gallup sample were dissatisfied with their ability to save — a meaningful deterioration from the 61% reading in 1997.
On the surface, this may seem like a very puzzling result. China's national saving rate is close to 50% and its household sector saves about 30% out of current income.
On this basis, China has by far the highest saving propensity of any major economy in the world. Yet, the Gallup Poll shows consumers are overwhelmingly dissatisfied with their saving positions.
The explanation for this apparent contradiction gets right to the heart of one of China's most vexing problems: The transition from a state-owned to a market-supported economy has led to a wholesale dismantling of the cradle-to-grave socialist support system that offered wages, shelter, medical care, education and even food allowances for most workers.
With headcount reductions in state-owned enterprises exceeding 60 million workers since 1997 alone, job and income insecurity has become deeply embedded in the Chinese psyche as reforms continue apace.
The fear of being next in the layoff queue, in conjunction with the lack of a safety net, has provided a powerful incentive for what economists call "precautionary" saving.
Until China makes meaningful progress in establishing a safety net and in uncovering new sources of job creation, I suspect dissatisfaction over saving will remain unusually high. That alone makes it very difficult for China to shift to a consumer-led growth model.
The good news is that China's senior leadership is fully aware of the challenge — and is now in the process of removing many of the impediments to consumer-led growth.
The just-enacted 11th Five-Year Plan places major emphasis on the expansion of China's social security system as the pillar to a new social safety net. It also provides special income support to rural areas, long the weakest link in the Chinese consumption chain.
And the new plan directs support to the nation's relatively undeveloped services sector, recognizing that the intrinsic labor-intensity of services offers great potential for a new and powerful source of job creation.
Only by reducing the excesses of precautionary saving can China's consumer culture truly flourish. Once that occurs, there is nothing but upside. Chinese consumption currently makes up just 50% of its GDP, well below the 65% norm of most major economies.
Putting it another way, 20% of the world's population accounts for only about 3% of total global consumption. The potential for the Chinese consumer could well be one of the greatest opportunities for the global economy in the 21st century.
But that begs the biggest question of all: Can China pull it off? The big risk in all this is time — that the emergence of the Chinese consumer unfolds very, very slowly. The reason: Generational inertia could make this a long uphill climb.
Today's Chinese adults have been subjected to the life-changing shock of state-owned enterprise reform. The State that once provided the ultimate security of the "iron rice bowl" is no longer the backstop of income and lifestyle support.
It is quite possible that workers who have lived through this wrenching transition may never have the confidence to reduce precautionary saving.
It's very similar to the mindset of a generation of Americans who never again bought stock after having lived through the Great Depression.
Instead, it may take a new generation of Chinese consumers — lacking the memories of reforms — to lead the way. I am very optimistic on the prospects for the coming rebalancing of the Chinese economy and the opportunities that offers for China's consumption dynamic.
But I am mindful of the possibility that it may take a good deal longer than I suspect or than China would like.
Stephen S. Roach
Former Non-Executive Chairman of Morgan Stanley Asia Stephen S. Roach is a senior fellow at the Jackson Institute for Global Affairs, Yale University, and a member of the Yale School of Management faculty. He was previously the Non-Executive Chairman of Morgan Stanley Asia (a position he held after serving as managing director and chief economist […]