China Consumer

The new consumers

Beijing’s growth model seeks to rely less on exports, more on domestic consumption

The new consumers

When Deng Xiaoping visited Japan in 1978, he found a nation from another galaxy in manufacturing terms. At a Nissan factory he was stunned to discover that 94 cars were turned out by each worker annually. At China’s top carmaker, First Auto Works, just a single car was being made per worker. “Now I know what modernisation means,” the former Chinese leader said.

Deng returned to Beijing and instigated one of the greatest economic renaissances the world has ever seen. Thirty years later China would be synonymous with mass manufacturing, surpassing Germany as the world’s biggest exporter.

In the wake of Deng’s reforms China’s economy grew at roughly 10% a year based on a simple model: factories on its coastline producing cheap exports and shipping them to the rest of the world.

There was a downside to this: huge trade surpluses have become a source of political friction, and dangerous imbalances in the global economy. As a result the world is looking for the Chinese growth model to be a little less reliant on exports, and more on Chinese consumers. Policymakers in Beijing agree, talking of more ‘balanced’ growth. The global financial crisis accelerated their plans.

In the first issue of WiC we looked at an ambitious new government programme called ‘Home Appliances for the Countryside’. Through a series of subsidies this aimed to persuade more of China’s 737 million rural residents to buy mobile phones, PCs and white goods. It worked well; we reported in WiC53 that between February 2009 and year-end 38 million household electrical appliances were sold, with refrigerators the leading purchase.

The government also proposed other measures to boost consumer sentiment over the longer term. It unveiled a $124 billion plan to overhaul the nation’s creaky healthcare system – the goal being to improve access and reduce patient costs (see WiC11). Local economists had long viewed inefficient health provision as a drag on domestic consumption. Why? The fear of getting sick, and the costs of paying for treatment, mean the Chinese put aside more of their income. A better performing health system should have the economic benefit of encouraging the population to spend more and save less.

Another change on the cards: wage increases. China’s growth model has relied on cheap labour but there have been plenty of signs this year that workers’ wages have not kept pace with the cost of living. Working conditions can be tough, and the suicides at Foxconn got the most media coverage (WiC63). The Taiwanese electronics manufacturer – which makes iPhones for Apple and employs 800,000 workers – responded to its labour issues by saying it would raise wages 30%. But it also plans to move some of its operations inland in search of cheaper production. Companies like Honda – which also faced strikes, as well as a minimum wage hike of 20% in Guangdong – may try to follow.

President Hu Jintao welcomed the wage increases (see WiC59). Higher wages, he said, would mean higher domestic consumption and less reliance on exports. The key message (as relayed by WiC as early as issue 50): a steady bout of wage increases and more domestic spending is the preferred method of dealing with China’s trade surplus – and not renminbi appreciation alone.

Wage rises on the coast also served another goal, turning attention to the development of central and western China. Foxconn’s inland move saw a new factory open in Henan, and others are likely to move from the coastal areas too.

WiC has written extensively about the economic development of China’s western provinces. A big chunk of the $586 billion stimulus package went into western China, further evidence of the ‘Go West’ policy in action. Just look at Chongqing (in issue 77).

But perhaps the most telling evidence of demand growth at home is in the industry that shocked Deng a generation ago: cars. Last year China toppled the US as the world’s biggest auto market. For the world’s press this spoke volumes: the Chinese consumer has arrived…

For more on this topic, see our Focus edition ‘From Made in China… to Made for China’.

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