Here Comes The Chinese Consumer
Although the greatest mining boom in Australia's history is winding down, if all continues to go well with China we should soon start enjoying the next great boom – growth in Chinese consumer spending, and on food in particular. But for China’s economy to evolve toward more consumer spending and services, more of the benefits of its economic development it seems, will need to be better shared.
Nothing lasts forever. The genesis of the mining boom was the fact that as China industrialisation ramped up, it could no longer meet it domestic needs through local production alone. But China’s ability to keep ramping up steel intensive heavy industry is faltering. It has lost its low cost competitiveness to other developing Asian rivals (like Vietnam and Sri Lanka), and has already produced a glut of apartments and infrastructure capacity across its developed east coast regions.
So where to from here? At least for Australian exporters, hopes rest in the ongoing rebalancing toward domestic services and consumer spending.
As noted in an analysis of the Chinese economy in the September quarter Reserve Bank of Australia Bulletin, although Chinese consumer spending has been quite strong in outright terms in recent years “consumer spending per person in China remains low relative to many other economies, including economies with similar incomes per capita.”
Note that between 1993-2002, real Chinese consumer spending grew at a 8.9% annual rate, and spending then lifted to an annual rate of 10.9% between 2003 and 2012.
Growth in consumer spending has been strong across the board, but spending on recreation, education, health and culture has been particularly strong over both time periods. This reflects strong growth in tourism and schooling, and recreation - such as cinemas - particularly among richer households.
The share of spending on food has declined over time - as it typical as living standards rise - but overall growth has still been robust, and a shift toward higher protein foods such as meat and dairy, relative to grain, is also underway.
Yet despite this strong growth, Chinese consumer spending per capita is still only only just over half the world average, and on fifth that in Australia.
Why? As noted by the RBA, one feature of China’s boom in recent decades has been the equally strong rse in income inequality. The RBA notes that China’s level of inequality is in the “top quintile worldwide”, and is even higher than in Australia, the United States and India. That’s ironic considering China is a supposedly “communist” country.
To be fair to China, however, incomes among poorer households have still been growing fairly strongly - it’s just that incomes of higher income households have grown much much faster. Average urban disposable income have increased from less than twice that of rural incomes in the 1980s to more than three times rural incomes by 2010.
To the extent household saving rates rise with income levels, the RBA suggests the strong skew of income growth toward already rich households - together with relatively poor social safety nets for the rural poor - has arguably contributed to maintenance of a relative high household saving ratio.
China’s poor need to save in case they fall on hard times, while China’s rich save simply because they can’t find enough things to spend their money on!
By boosting the incomes of poorer households, and improving social safety nets, savings rates may be able to fall and consumer spending as a share of the economy might rise.
That’s also true for economic development more generally. Indeed, China’s major eastern coastal cities are already very well developed. Where there is untapped growth potential is through improving not only the incomes of its poorer rural households, but also improving infrastructure services for the relatively less well off inland western regions.
If China can manage this transition, it bodes well for Australia, particularly given our natural endowments in agriculture. That said, apart from say relative proximity, Australia’s has no natural competitive advantages in providing other consumer goods and services - so we’ll need to compete with the best that Asia, Europe and the United States has to offer.
David is one of Australia's leading economic and financial market analysts. His is Chief Economist with BetaShares, and an Economic Advisor to the National Institute for Economic and Industry Research (NIEIR). His has held former roles as senior commentator with The Australian Financial Review, Macquarie Bank interest rate strategist and Federal Treasury economist. He is also author of the online e-book, TheAustralian ETF Guide.