China looks to spur consumer spending to maintain growth rate

McClatchy NewspapersFebruary 13, 2012 

SHANGHAI — China's government, which has overseen enviable economic growth for the past three decades by pushing huge volumes of exports, is searching for ways to get its own people to buy more things in hopes that will help sustain its economic miracle.

Whether it can pull off this slow but seismic shift is an open question, however, one that carries important implications not only for China but for the United States as well.

Multinational companies have long looked at China's burgeoning middle class — the size of which now exceeds the entire U.S. population — as the dream consumer market. Some are doing quite well. General Motors sold more than 2.35 million vehicles in China last year, exceeding its sales in the United States by more than 130,00. When Apple introduced its iPhone 4S here last month, hundreds camped outside its stores in Shanghai and other cities and a mini-riot broke out in Beijing when the company said it was too dangerous to open its store there due to the crowds.

"We welcome China's continued economic growth, because a prosperous China is good for the U.S. economy," Richard Buangan, a spokesman for the U.S. Embassy in Beijing, said last month while announcing a huge increase in Chinese visa applications to the United States. "It creates American jobs and it fuels worldwide economic growth."

The stakes are also high for China.

"This is hugely important," said Shaun Rein, the managing director of China Market Research Group in Shanghai. "If it gets this wrong, the economy is going to stall. It's a paradigm shift that everyone here recognizes needs to be done. If Europe's economy collapses and exports (from China) get hit real hard, what's going to happen to all the unemployed workers in China? The government wants to minimize the social instability risk that could happen."

Trade issues are certain to come up when the heir apparent to China's top leadership position, Xi Jinping, meets with Obama administration officials Tuesday in Washington in a high-profile visit that's intended to highlight Xi's ability to deal with China's increasingly complex relationship with the United States.

Trying to persuade Chinese to spend more to keep the economic dynamo going is an internal issue that faces deeply engrained cultural obstacles.

For one, the Chinese people are notorious savers. Lacking the social safety net that's taken for granted in the West, they save for their children's education, for medical expenses, for retirement and to buy homes. It's an ingrained part of the culture that won't be easy to change, despite the occasional headlines over shopping mania.

"You have to spend what you need to, but I don't like to spend too much," said Lin Juwen, who moved to Shanghai in November from the southern metropolis of Guangzhou. When she was asked whether she'd spend more or save if given a raise from her current 3,200-yuan-a-month salary (slightly more than $500), Lin shrugged and said, "I would save it."

What can the government do to impel consumers to spend in a nation of savers?

"The government should transfer more money to households to make sure they have enough to spend," said Zhou Hao, an economist at ANZ Bank in Shanghai. "Make it more fair and transparent. We need a system to make sure people have more long-term funding. We need to improve the public welfare system and the public housing system. The government is trying to do these things but is very far from achieving success."

Rein, whose book "The End of Cheap China," comes out in March, says the government needs to improve access to health care, continue to hike the minimum wage — which it did in 22 of China's provinces last year — and lower import tariffs so that products aren't so expensive.

"China is no longer a cheap place to do business," he said. "You cannot rely on the export sector at all. China has to see a shift anyway to service and higher-end manufacturing," jobs with higher salaries. "Right now, manufacturing is killing the country. Pollution is high. They need a healthier economy and environment."

Andrew Rothman, a China macroeconomic strategist with CLSA Asia-Pacific Markets in Shanghai, said the economy was in the midst of change and argued that it's already largely consumer-driven.

"Forget about the fact that household consumption accounts for a small share of China's GDP," he wrote last month in his economic forecast for this year. "Driven by more than a decade of double-digit income growth and low household debt, China will this year continue to be the world's best consumption story, for everything from instant noodles to luxury cars."

He forecasts that the government this year "will continue to ramp up spending on education, health care, social (low-income) housing and the environment."

Rothman's contention about Chinese consumers is borne out by some of the recent numbers. Retail sales, along with incomes, have been rising at a fast clip for years. According to China's Bureau of Labor Statistics, consumer spending rose 17.1 percent last year.

And while China's trade surged anew, up 22.5 percent from 2010 to $3.64 trillion, its trade surplus narrowed to $155 billion, down 14.5 percent, as imports accelerated faster than exports. China still enjoyed a gargantuan $272.3 billion trade surplus with the United States, however.

China already is the second-largest purchaser of luxury products in the world, with its expanding class of millionaires. Now national and regional governments are trying to find ways to bolster the standard of living for middle- and lower-income Chinese, as well, in part to free up income to spend on consumer items.

Shanghai, mainland China's biggest and wealthiest metropolis, has taken several steps in recent weeks aimed at bolstering the spending power of its 23 million people. They include making more people eligible for subsidized housing, raising the minimum wage, increasing public pensions by 15 percent on average for 3.1 million people and tying the wages of workers for state-owned companies not just to the companies' growth but also to the rising incomes of the companies' leaders.

At the national level, the central government pledged last week to hike the minimum wage an average of 13 percent annually during the next five years. The goal is to have those at the bottom earning 40 percent of the local average salary by 2015. China's minimum wage varies by city and province, ranging from 870 yuan a month (about $140) in Chongqing to 1,500 ($240) in Shenzhen. In Shanghai, it's 1,280 yuan (about $203) a month, but it's scheduled to rise April 1.

Despite the savings culture, the government is counting on those who earn more to spend more, people such as Zhu Xiao Gang. Zhu, 30, who was questioned while he shopped Sunday in a major Shanghai electronics store, said he saved part of his 4,500-yuan-a-month salary (about $715) from working for a telecom company, but probably would spend whatever he got in his next raise.

"I want to buy some more expensive products," he said. "So I will probably save more just to buy the things I want later."

In addition to pay raises, a big key to improving Chinese people's incomes is simply the continuing migration to the cities for jobs. It began by design, with China's initial moves into capitalism in the early 1980s, when millions began flocking to Guangzhou, Shenzhen and Dongguan as factories ramped up production of toys, sewing machines and clothing to sell to the world.

The migration continues as the government encourages employment in the cities, where the pay is much higher. In its current five-year plan, the government is offering tax breaks and other financial support to urban enterprises, especially small- and medium-size ones, to spur more jobs and drive up incomes.

China passed a milestone last month when it was announced that urban dwellers outnumber their country cousins for the first time, by 51 percent to 49 percent. Some 690 million people now live in China's cities, where salaries are more than triple those in the countryside.

That difference continues to attract migrant workers, who now number more than 250 million, an increase of 10.5 million in the last year, the Chinese Bureau of Labor Statistics said. Their average monthly income was put at 2,049 yuan (about $320). While that may not sound like much, it represents a 21 percent increase in one year, and it dwarfs what they'd earn back home on the farm.

That's the kind of steady progress that China's government is trying to engineer in hopes of keeping its economic juggernaut moving forward.

(Melnicoe is a McClatchy special correspondent.)

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