Young leading China consumer boom: mkt. researcher

By John Sexton
0 CommentsPrint E-mail, July 31, 2010
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Young people, women and rural consumers are leading a spending boom that is powering the Chinese economy, a leading market researcher said Friday.

Shaun Rein, managing director of China Market Research, said stereotypes notwithstanding, Chinese people do not save excessively. Older people who lived through hardship and upheaval may bank half their income, but a generational shift is under way.

"We interviewed 5,000 people under the age of 32 across China. They have an effective savings rate of zero," he said.

Not only are the young abandoning the thrifty habits of their parents and grandparents, they are also starting to follow the example of American consumers by buying on credit. Rein said the number of credit cards in China has jumped from 13.5 million to 200 million in just five years.

"Younger Chinese are unbelievably optimistic. That's why what you see is a secretary earning six or seven hundred dollars a month – they're the ones buying thousand dollar Gucci bags."

Rein dismissed the widely held view that Chinese incomes are not rising fast enough to sustain consumer spending. Earnings figures reported by the government, he said, do not reflect employee incomes, as firms systematically understate wages to avoid tax and social security payments.

One of the downsides of optimism among young Chinese is the plague of job-hopping, with labor turnover around 30 percent per year, compared to 10 percent in America, Rein said. But this reflects confidence about the future which, in turn, translates into retail sales.

"When you look at spurring consumption in China, we don't have to worry about it, because it's already happening."

Rein also points to major demographic shifts. Women are increasingly taking the big spending decisions in Chinese households and in many cases are the major breadwinners. Women's concerns about product quality and food safety in particular are favoring high end, especially foreign brands. In the wake of the melamine scandal, wealthier young mothers even began to fly overseas to stock up on baby food.

The fastest growth in consumer spending, says Rein, is taking place in China's lower tier cities and rural areas. When the government gave subsidies to rural families to buy consumer durables as part of its stimulus package, fridges and cookers sold well, but televisions did not. The reason, Rein said, is that flat screen televisions were not subsidized, and people no longer wanted older box-style sets.

Rein recognizes that his views run counter to conventional economic wisdom about structural imbalances in the Chinese economy resulting from export dependence and wasteful state-led investment.

But he says government statistics fail to capture the vibrancy of China's consumer boom because they ignore the thriving grey economy, which he calculates at between 50 and 70 percent of official GDP.

Rein says in-depth interviews with 10,000 people in 15 Chinese cities conducted by China Market Research over the past year give a more accurate picture of what is really going on in the economy.

But economists will take some convincing. Michael Pettis, finance professor at Peking University, and Chief Strategist at Shenyin Wanguo Securities is skeptical about China's consumers, and about claims based on estimates of the grey economy.

"Consumption is officially 36 percent of GDP. Even if consumption in China is vastly understated, it's still much lower than in low consuming countries," Pettis said.

"And people are making a huge assumption, that when you compare China with say Indonesia or Malaysia you can assume there's a grey economy in China that causes consumption to be understated, but in Indonesia and Malaysia things are so transparent that this couldn't possibly happen."

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