Can China’s Consumers Save West?
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Can China’s Consumers Save West?

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Although a long succession of Western leaders, bankers and finance officials have held out the holy grail of the Chinese consumer’s purchase of Western exports as the savior of flagging economies, it may well remain a distant dream. 

It’s certainly true that China, with an embarrassing $3 trillion in foreign exchange reserves and trade and current account surpluses that amount to 10 percent of gross domestic product, has been seeking to drive up imports.

Yu Ping, vice chairman of the China Council for the Promotion of International Trade, told reporters at the Asia Pacific Economic Co-operation forum in Hawaii in November that the current five-year plan is focused on balancing imports and exports. The plan, he said, “demonstrates China’s resolution to improve its status in technological development as well as its determination to leverage the country’s massive domestic market.” As an example of that resolve, Vice Minister of Commerce Zhong Shan said in Shanghai in September that the commerce ministry was considering cutting taxes on imported consumer goods and was soliciting guidelines to encourage more imports. Andy Rothman, the China macro strategist for CLSA in Hong Kong, in a recent report pointed out that China’s share of personal consumption expenditure for U.S. goods has doubled over the past decade, with U.S. exports of electronics, agricultural and other products to China rising by 468 percent from 2000 to 2010. 

Still, there are formidable structural obstacles to raising consumer spending in China that could take decades to unravel. Chinese household savings are as high as 50 percent, partly due to the region’s traditional conservatism, but also because the country lacks a social safety net. Pensions are almost nonexistent, along with reliable health insurance – either government or private. The education system is equally troubled, to the point where families who want to give their children adequate schooling must send them to private institutions. While the university system is improving, many wealthy Chinese send their children overseas. 

Consumers are also cautious. According to government statistics, private household consumption was only 37 percent of gross domestic product in 2009, down from 49 percent in 1990, a fact that’s likely best explained by the massive rise in GDP over the period. In the United States, by contrast, household consumption accounts for 70 percent of GDP, including spending on health care by both individuals and government.

Statistics on consumer imports themselves are also problematic. Much depends on the definition of what is an export and what is an import. It’s no longer a world where a manufacturer produces a mousetrap in Pekin, Illinois, and sells it in Beijing. Galina Hale and Bart Hobijn, two economists for the Federal Reserve Board of San Francisco, in a widely circulated August 8 issue of the board’s Economic Newsletter, use the example of an Apple iPhone; in 2009 it sold for about $500 in the United States and was produced for about $179 in China, the economists found. That ought to mean that $179 of the retail cost consists of China-based content. The other $321 represents U.S. costs, markup, retail rental costs, design and research etc. But Hale and Hobijn found that only $6.50 of that iPhone assembly price was actually due to assembly costs in China. The other $172.50 reflected the cost of parts produced in other countries besides China – including $10.75 for parts produced in the United States and exported to China. 

Across the board, Hale and Hobijn found, “on average, of every dollar spent on an item labeled ‘Made in China,’ 55 cents go for services produced in the United States. In other words, the U.S. content of ‘Made in China’ is about 55 percent. The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services.” 

It’s the same going the other way. Goods stamped “Made in USA” don’t necessarily come from the United States. For instance, one of the country’s biggest export categories to China in 2010 was aircraft, at $5.6 billion. But only 70 percent of the parts for the 787 Dreamliner, Boeing’s newest-generation aircraft, were produced in the United States. The other 30 percent came from the 70 operations the plane-maker has outside the country. Thus, while the United States swells with pride over its homegrown Boeing, at least 30 percent of the manufacturing jobs are elsewhere. 

Comments
7
cc
August 14, 2012 at 05:48

One important  things to help china is stop out-sourcing work into mainland China. Stop purchase any Made in China product. Product line inside China should move to other countries. Stop  Import raw material like iron ore and gasoline  into China.  Stop import technology and strategy commodities into China to be a copy model and resell worldwide. 

Frankie Fook-lun Leung
January 19, 2012 at 08:10

The paradox is that Chinese rich bought more Rolls-Royce limousines a year than any other country, yet at the same time there are reportedly so many poor people. Readers in the west are confused. It becomes difficult for some international aid agencies to raise funds to alleviate social and health problems in china while the public in the West are inundated with news about luxury goods having such an enormous market in a supposedly poor country.

SCdad07
January 9, 2012 at 12:57

Along the same line, all SOE companies would be required to pay dividends on monthly basis into the ‘fund’. Every citizen in China would be required to have a bank account; into which, direct payment is deposited monthly until ‘death do they part’.

Though it may be small per month, but it can grow and accumulate over years just like college and retirement fund.

China would create another million of jobs in order to carry this out.

Steve Howe
January 7, 2012 at 01:40

Distribute shares in SOEs to ordinary householders and then China consumerism might take up the slack

Liang1a
January 6, 2012 at 12:52

In a word, no.

Leonard R.
January 4, 2012 at 12:47

The answer to the author’s question is ‘no’.

China’s consumers cannot save the West. They can’t even save China.

Yang zi
January 4, 2012 at 12:22

China can easily create rich farmers in US, high food prices in the world, hungry people in the third world.

But food security is important, China tries to feed itself on its own.

However, I see no reason why China cannot import more soybeans from US. China wouldn’t mind to import a few F-22s, but it is only a few billion dollars, commodities are where the money is.

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