Economy

Spend more, make more

Is China coming round to the need to save less money?

Go on treat yourself... and help the economy in the process

Amid the welter of numbers to emerge from China in recent days, two are particularly striking.

Between September 26 and October 8 (the holiday period known as Golden Week) consumers bought 26 million televisions, a surge of 120% on the same period in 2008.

Another stat: the average size of the flat screens being hauled home exceeded 37 inches.

That means the Chinese are now buying bigger TVs than the Americans (the average is 33.14 inches stateside, if you’re interested), according to the Financial Times.

Further signs of ‘China Rising’? Possibly. Although sceptics might point out the rise in this case is in the number of couch potatoes.

But the Chinese have been busy outdoors too. As we mentioned last week, HSBC estimates that the government has launched more than 60,000 new infrastructure projects. That’s roughly 250 a day.

All of which helps t0 explain why national GDP grew 8.9% in the third quarter. Full year growth of 8% now looks inevitable (although cynics will say that was always likely to be the case).

In fact, HSBC economist Qu Hongbin has raised his GDP forecast to 8.5% (and reckons growth in 2010 will hit 9.5%).

“The recovery is stronger than expected,” he notes.

Little wonder that FT writer Martin Wolf thinks that “China has had a good crisis.”

But the statistics on TV sales and infrastructure spending are rekindling a broader debate. In Wolf’s view, China still needs to “rebalance” its economy to become less dependent on construction-fuelled and export-led GDP growth.

The answer is to increase consumption. “It is time for the Chinese to enjoy themselves more,” Wolf declares, “How unpleasant can that be?”

HSBC’s Qu shares this view, arguing that infrastructure spending will sustain high GDP growth in 2010, but “to maintain this pace beyond next year, China must act to further stimulate consumption to promote more balanced growth.”

China’s economy suffers from excessive saving. And not just among its citizens, Qu says. He calculates that the government has a 40% savings rate (with income last year of Rmb6.1 trillion but consumption expenditure of Rmb4.1 trillion).

Rather neatly, the solution to the two problems is connected, Qu adds. China’s populace saves a lot because it worries about getting sick ( hospital bills), educating its children (school fees) and the future costs of retirement.

In fact, a recent survey by the People’s Bank of China gave these three fears as the main reasons for the nation’s cautiously large savings rate (almost 40% said their children’s education was the key motivation to save, versus less than 10% citing a home purchase, for instance).

So Qu, like others, is calling for some of the funds allocated to infrastructure spending to be diverted into education and healthcare.

China spends only 3% of GDP on education, the lowest of the world’s major economies. Qu’s suggestion? “The first thing the central government should do is to allocate more funds to increase the wages of the millions of school teachers in remote countryside areas who earn less than Rmb600 ($88) per month. More resources should also be given to schools in poor areas so that they can provide enough textbooks and other necessities for their students. All this should increase government consumption spending immediately.”

He also welcomes the government’s plan to spend Rmb850 billion to improve access to healthcare. His only concern is that it isn’t enough and that is should be doubled over three years.

The trick is to make Chinese citizens feel more secure, so they save less and spend more.

Then they will buy more of those consumer goods that factories had previously sought to export, but which are now in less demand overseas (where individual savings rates are climbing again).

Ergo a rebalancing of the economy.

On the plus side, current consumption is already showing signs of growing without the proposed boost to welfare spending.

That is partly a function of the revival in the real estate market, with the square footage of property sold in the third quarter surging 70% year-on-year.

New homeowners are often in the mood to buy new home appliances too, like those flat screen TVs. New furniture and home decoration materials have also been in demand; the two categories grew 34% and 30.2% in September respectively (on a year-on-year basis).

Consumer spending as a whole rose 15.5% in September.

In fact, the rebalancing debate is picking up pace just as Obama tries to generate momentum behind his own healthcare spending plans.

It’s something of an irony that China may choose health spending as a way to energise local consumers just as the Republicans try to block US healthcare reforms.

Indeed, when Obama visits Hu Jintao next month, he may even tell China’s president how much he envies him. After all, no one will criticise Hu for spending vast amounts on healthcare – instead they’ll say he fixed China’s economic model.


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