Converting China to a Nation of Spenders

Chinese consumer will not easily become a nation of spenders

Please bear with me for just a moment. So the sub-prime mortgage scandal in the US has precipitated a global credit crisis, where banks cease or curtail new lending and call in outstanding commercial and personal loans. Overdrawn Americans lose their houses to the banks and reduce spending. Companies cannot expand without loans, reduce their business, and lay off employees. US unemployment rates skyrocket and consumers put the brakes on spending. This effect goes around the world, precipitating reduced global spending. China and other predominantly export oriented countries get hit hard. Their factories lay off workers and close. It seems all is not economically well in the world.

During this recession there is a thought that since the US, the world’s biggest spenders, has gone into recession, China’s domestic market can step in to take its place. China on the surface, with 5 times the population, might seem like a likely market but its people cannot and will not spend to make up for the Americans.

I would argue that Asians, China and Chinese on the whole have saving as an important principle within their culture. This is not to say that North America and Europe are free spenders. The Scottish are also known for their thriftiness. There must be others, but I do not know. “Save for a rainy day” is a common saying here in North America.

Specifically in China, it would be difficult to see any monumental change in the domestic consumption rate in the short term. Chinese will not simply increase spending just because whomever has encouraged them. After all, the typical Chinese person has much to lose for overspending. Here are some issues:

• No Universal Health care: Get sick in China and you’ll probably need to pay cash before the hospital will provide treatment. You can bankrupt your family if the illness is severe.
• Kids must pay for their education: Be it high school or university, there’s no government scholarships anymore, and education is expensive. If you want your kids to do well in life, education is key.
• Consumer protection laws are lax: You buy a washing machine and it breaks. It’s a lemon. Who can you turn to? No one, including the government. You’ll need to get that product fixed or buy a new one. Domestic products in China are typically of terrible quality.
• No Social Security: With the onset of retirement there’s no pension for the majority of China’s farmers. State owned enterprises may go bankrupt, leaving their retirees with nothing. Private enterprises rely on themselves. The traditional Chinese method to ensure a happy old age is to have many kids who will take care of you. With China’s one child policy this traditional method is seeing cracks.
• Widespread Corruption: If you need something done, it may be better to pay off a few people. This costs money.
• No ownership of land: You might own your house, but not the land. The land is owned by the government, and can ask you or force you to move at any time. No it’s not nice but it is legal.

Even a cursory look at China’s social security net reveals very large holes. No one wants to be old and destitute, not even the Chinese, so they save as much as possible to mitigate for the risk of an uncertain future. Certainly this social system and culture will not change in the near future, and it would be irresponsible to suggest to the average Chinese person otherwise.