President, Kotler Marketing Group November 2011
It is generally acknowledged the China’s rate of export growth in the foreseeable future. It is also acknowledged that the rate of will decline consumer spending is increasing. The central strategic issue is whether consumer spending will grow fast enough to offset export decline and result in a soft landing of a declining GDP rate of growth.
China nominal GDP in 2010 was $5.9 trillion. Its annual growth target for 2011-2015 is set at 7 percent, lower than the 11th Five-Year Plan of 7.5 percent. The new target would yield a lift by 2015 of a nominal GDP to $8 trillion. This is below many external estimates and a conservative goal. China's actual annual economic growth rate during the 11th Five-Year Program was 11.2 percent, 3.7 percentage points greater than the growth target. It is likely that growth in the 12th five year plan will also exceed its target, but more likely by only half of its past surfeit, possibly to 8 or 9 percent. The growth reduction from the past period is due to long term stagnation of developed markets, growing protectionism, and growing alternative export sources from fast growing, lower cost developing countries.
There are three sources of revenue for this growth goal: 1) the export market; 2) government fixed asset investment; 3) and consumer spending. The picture is not promising for exports and government fixed asset investment. The major source of growth has to be consumer spending.
Current exports account for 37% of China’s GDP. As of October, 2011 exports rose 15.9 percent year on year to $157.49 billion, the lowest growth rate in five months, according to the General Administration of Customs. Experts see bearish trends. According to Tao Wang, UBS, "We see export growth slowing to low single digits in the next few months." Growing imports may zero out trade surpluses and even lead to serious deficits. While there is still a vast currency reserve that can be used for internal stimulus, fixed asset government spending on infrastructure may not be sufficient for job creation to offset export decline; nor can stimulus continue over the long haul, against claims on revenue for government operations, and restraints on monetary liquidity. It is important to note that only five percent of the 2009 stimulus contributed to consumer growth.
The key to offsetting the impact of export decline and fiscal restraints on continued stimulus to achieve an annual 7 percent growth in GDP falls squarely on the shoulders of consumption growth.
Consumer spending currently accounts for 36 percent of GDP. In 2011 the domestic market grew 17 percent to reach its present ratio of 36 percent of GDP. The 12th Five Year Plan projects the share of private consumption in China's gross domestic product (GDP) will to jump to up to 45 percent by 2015. This is 9 percentage points above the current level, and roughly where the ratio stood in 2000. If the export percentage falls into the single digits, and a loss of several points of GDP, an actual 9 percent consumer growth can offset this loss.
In order to achieve the five year goal of $8 trillion nominal GDP, China needs a consistent annual increase of 17% in consumer spending, as well as a stable export growth over the period of approximating 15%. But if export growth falls to single digits, consumer spending will have to exceed its current 17 percent growth, by a considerable margin.
The strategic issue for China is how it can grow consumer contribution to GDP by 9 points – from 36% to 45% of GDP – for the remaining years of the 5 year Plan, keeping in mind the historic decline of consumer spending to GDP from 46% in 1999 to 36% in 2010; the historic decline of the ratio of household income to GDP; inevitable fluctuations in consumer spending over a five year period; and the burden of even larger consumer growth due to likely export decline. This is an enormous challenge and shift of China’s economic growth paradigm.
This shift requires four fundamental demand side changes. First, the Chinese people have to command a higher share of national income, in order to have more income to spend. As of 2007, Chinese households gained only 56% of national income, the lowest of any major country. Second, Chinese households have to spend more of their disposable income. As of 2007, the Chinese savings rate was 26%, far higher than developed countries. Third, there has to be a strong growth of small businesses to penetrate the consumer market and heightening purchasing though marketing and sales pressure. Fourth, credit has to leverage spending. Disposable income actually spent instead of saved will not grow fast enough. China’s consumer credit of 3 percent of spending is among the lowest in the world.
These robust demand changes require four corollary policy changes. First, public policy must reallocate domestic income from the State owned industries to households. This is a political challenge of the highest magnitude. Second, public policy has to strengthen SMEs with new lines of bank credit, so they can generate new goods and services that consumers want to buy and channel these goods and services to them. Third, Government has to propagandize the importance and virtue of spending. Finally, consumer credit has to be facilitated and encouraged to offset a cultural habit of savings and a fear of personal debt. These are difficult changes, but they have precedent.
In the first instance, Chinese policy grew 2011 per capita disposable income 13.7 percent from 2010. Larger income growth is imperative, to offset the habit of savings. Second, a strengthening of SMEs is less difficult politically than the Deng Xiaoping’s initial ratification of private enterprise. “To be rich is glorious” is a bolder contradiction to ideology than “To spend is glorious.” The Party has the wherewithal to legitimize and propel a cultural shift from saving. Finally, it is far easier to expand the consumer credit use than it was to institute the credit system in the first place.
Among these policy incentives, the strengthening of SMEs is paramount. Small business, world-wide, is the key driver of economic growth. State-owned industries cannot grow consumption. They generally serve State-owned and private sector business markets, not consumer markets. Further, to the degree that they serve consumer markets, they acquire successful small businesses for this purpose. It is small business that invests the greatest human energy in actually selling goods and services to consumers. China must facilitate this strengthening of SMEs with credit availability, regulatory support and ideological promotion of entrepreneurialism.
Finally, we come to the sticky issue of who will own the growing consumer market? If a Chinese merchant class fails to capture consumer growth, then foreign companies, far more adept at marketing, will dominate the consumer market growth. China’s economic fate will once again fall in the hands of foreign power, in this case corporate rather than imperial power. Only Government policy support of SMEs can secure a suitable balance of domestic and foreign ownership of the consumer market.