There Are Many Ways China Can Hit 8% Growth – Part 2

Monday, January 19, 2009 0:01

Consumption

In general, not only do I see driving an economy through consumption as a poor option, it is an option that America has shown is not sustainable. In fact, not only is it not sustainable, I think that many now believe that actually driving an economy through consumption is as a bad idea as driving it solely on an export basis over the long term.

for myself, I keep thinking back to when I was home last and while driving around I realized that people possessed a lot of stuff, but owned little. That while they had the 5000 sq ft house and a nice car, their overall economic condition was significantly weaker than had they remained in their previous home driving their 5 year old car. Consumerism was a mechanism that brought short term gains (yes, I am implying that 8-10 years is short term), but over the long run it destroyed far more.

In the greater China context, consumerism is a fortunately a philosophy that has largely been muted to date. Young Chinese are certainly purchasing more, are paying to go out for meals, and are more likely to travel, however their ability to consume is still constrained in a number of ways. Most recently, I have seen these constraints turn from the puire budgetary constraints (do I have the money to buy it?) to the mental (Can I afford to buy it?).

Chinese citizens, note citizens and consumers are different, have seen the stock market melt more than 60%, have seen real estate conditions deteriorate, are concerned about their careers (keeping job, improving salary, etc), but are hearing from senior leaders that the economy will rebound in 2010.. not exactly the economic indicators that citizens look for when making consumption decisions.

As a result, many firms in the auto, luxury, travel & tourism and real estate industries have begun reporting a significant decline in spend. A condition I expect to continue for the near future (Q1 2009), possibly into later in the year (Q2 and Q3), and a condition I feel will see little upside through government measures (tax or rebate based).

Simply put, for people to spend, it will take an increased confidence that comes through an improved safety net or an improved global economy.

Rural Economy

Where the greatest opportunity lies, in my opinion, is in the rural economy. It is the economy that has lagged far behind the others – It is the economy that has more than 700 million people – It is the economy were small nominal gains can equate to large percentage return – and it is this economy where I am seeing some real progression in terms of policies being announced.

Social security, health care, education, and policies designed to support SME have all been announced in the last two weeks.

It is in fact, perhaps the only sector of the economy that the central leadership has been focused on the entire time, and over the long term, it is this population is the target of nearly all the plans that the government has in place related to urbanization and the rural economy.

So, to continue to implement policies that supports this group and provide this group with opportunities to improve their quality of life in a measurable way, is perhaps the only option that I believe will achieve the most return.

The most sustainable return.

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5 Responses to “There Are Many Ways China Can Hit 8% Growth – Part 2”

  1. Clement Wan says:

    January 19th, 2009 at 7:30 am

    re: Consumption – pushing people to purchase things that they don’t need isn’t sustainable but I’m really not convinced by the argument that this crisis shows consumption is unsustainable. I suspect that the artificially low interest rates provided the stimulus for consumption not to mention the disincentives for saving. Government spending money doesn’t generate sustainable growth in itself either. I do however agree with your final point that it does however require consumer confidence in order for them to start spending as if it matters – and as I think the Stetser reports have pointed out, the average consumer in China is still remarkably poor.

    Relating to your second point as well, sustainable economic growth comes from either innovation or arbitrage. In this light I do not think it is viable to depend on rural growth through the creation of a social net in rural areas for two reasons – (1) government spending only destroys value – they can spend to improve annual growth but this won’t be a one-to-one spend:gdp growth ratio; (2) the rural world is woefully inefficient given the small plot sizes. Certainly some co-operatives have gained in size but at least from what I’ve seen the large majority seem to still be small inefficient farms. To see productivity gains, there will need to be mass relocations through urbanization.

    Urbanization, I think, happens for the very reason that people are more productive together and usinng their minds and working closely together to create ideas and products than tilling fields. It goes hand in hand with industrialization. Of course, with the improvment of the internet/infotech I think we will see a return to rural areas in developed economies, but this return requires a highly educated work force to be able to work using internet/infotech
    infrastructure that I do not believe that China has.

    To achieve their growth targets, I think the government needs to make some hard choices about state enterprises that crowd out private ones, excessive regulation at all levels that provide incentives for corruption and consistent/lower taxes (this business of having the vat rebate bounce all over the place is not business friendly and plays a ridiculous amount of havoc on business planning)

  2. Rich says:

    January 19th, 2009 at 7:51 am

    Hi Clement.

    Thanks for your comments.

    A few things:
    1) Government spending in your words may be destructive, but what I was hoping to portray is that there are investments that the government can make that are (1) less destructive and (2) enable positive investments. Rail systems vs. road. hospitals and schools vs. a bridge to nowhere.

    2) Urbanization is seen as the economically attractive option for many, however there are real gains that can be made on the farm that have a last impact on their economies and lively hoods. Small plots aside, the education level of farmers in China is very low, and their yields are far below where they should be. It is money lost for farmers, and an investment in education would hold a return

    3) I completely agree on the hard choices. I think the US has some hard choices as well on the “too big to fail” front as well.

    4) A lot of work needs to go into improving the regulatory environment. To be honest, the VAT rebate does not bother me much in theory. It is the fact that a 5 day notice is given… it creates the havoc you mention

    R

  3. Chicago Resident says:

    January 19th, 2009 at 8:25 am

    Rich,

    I agree with you that the rural economy is one of the areas of tremendous growth in China. When I look at the countryside, the farming equipment and processes per acre are not on par with America. Farming there is still very inefficient. But I want to stress, that rural growth can only be realized in reducing headcount, i.e. getting people out of the country and back into the cities.

    I applaud the government in the push for tradeable land contracts. Let the marginal farmers sell their land to the more profitable ones. This will decrease food prices. Decrease food prices means real wealth for all Chinese. And by giving up their land, they can go into the cities to look for jobs. This is one of the key reasons why America became great. Farming got more efficient and people left the countryside in droves because there were no jobs for them.

    However, farming equipment has not drastically improved in 20 years. This is where the opportunity lies. If you can engineer farming equipment to cut the prices of food in half, you will be extremely rich.

  4. Rich says:

    January 19th, 2009 at 8:35 am

    CR.

    the problem with the equipment ( I will only speak to Shanghai/ Jiangsu/ Zhejiang) is:
    (1) the land that the average farmer does not warrant investing in farm equipment
    (2) the condition of the land itself does not lend itself to investing in farm equipment
    (3) farmers cannot get the money

    The recent land reform discussion would (over the long term) aid that as (theoretically) a single farmer/ group could take up leases on large plots and then use those legal documents as collateral to buy equipment.

    There are a lot of technical hurdles to be over come, which I covered thorugh the post Some Thoughts On China’s Land Reform Plan.

    I think through some investment in China’s farmland, and in its farmers, gains would be made though, so working on those hurdles will take on a higher level of importance.

    Thanks for the comment.

  5. Rich says:

    January 20th, 2009 at 6:13 am

    As a follow up to the above, the Reuters article China’s Suning sees 2008 net lower than expected offers the following:

    Suning, whose net profit in 2007 was 1.47 billion yuan ($215 million), said the revision was necessary because of lower domestic consumption

    This in the face of reduced pricing, and government rebates, in the retail sector.

    R

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