The great thing about the internet is the speed at which you can do research. When I heard commentators claiming that China was going to save the world from recession by transforming itself into a bunch of consumers who would take up the slackening demand of western consumers I could hardly believe what I was hearing.
Is there something about the majority of economists that makes them incapable of understanding how real humans behave? What is it that stopped these commentators from asking the simple questions – how are we going to transform human behaviour so quickly? Has this type of mass transformation of human behaviour ever happened in the past? When it has, how long did it take and what mechanisms were used? Moreover, are there examples where this shift from saver to consumer occurred in a deteriorating economic environment?
One of the reason that we in this current global financial meltdown and that we are in an equivalent, but as yet unacknowledged, ecological meltdown, is that we have been seduced by a number of false beliefs.
Bubbles and cycles are nothing new – everything in life is subject to the cycle of birth, growth and final decay. And the delusions that inevitability accompany these bubbles are nothing new. New false beliefs are a key part of what drives bubbles – The key false belief system is that this time it is different – we have a “special case”. Here are a few examples you might recognise.
– it is not a bubble
– the growth of China and India have rewritten the old economic rules
– we are in a super-cycle
– house prices never fall
– the world has de-coupled (the world is more connected that ever before)
– Securitisation reduces risk (to the person who issued the security but it acts like a virus and spreads risk and hides it amongst the purchasers of the security)
– The Masters of the universe actually understand what is going on
– Free markets allocate capital efficiently
– People act rationally
One of the few remaining and as yet undiscredited beliefs that I have difficulty agreeing with is the story that we will be rescued from this meltdown by the “Chinese consumer”.
The assumed logic in this belief is that China will defy the global slow down. We are being told that it is a “special case”. And that while growth will slow down from around 11% due to a decrease in global demand for Chinese exports it will remain high at around 9% for two reasons. First, the domestic infrastructure construction boom will go one unabated. Second, domestic demand will increase because the Chinese consumer will pick up a lot of slack by suddenly consuming more.
My thoughts are that we are projecting our wishful thinking onto the Chinese. It is easy to project onto someone you don’t really know anything about. And we are imagining that the Chinese must be just like us – a nation of consumers.
I have a bit of difficulty with the story. My prediction is that Chinese consumers will do the opposite – in the current uncertain economic climate they will save more rather than spend more. They will act like the rest of the humans in the world would do in this type of situation rather than a special case.
Moreover, the Chinese have not yet developed into American consumers and they may never do. Americans used to value hard work and saving for the future like the Chinese do now – and many of them still do. The conversion of the American population to the “religion” of consumerism and the source of happiness is a relatively new phenomena.
The reality is that Chinese private consumption has been falling as a proportion of GDP for a number of decades – so why should we expect it to suddenly change tack? Surely there has to be reasons that it has been falling. What might these reason be and are they going to change overnight to get the boos in private consumption that is being predicted?
Lets start with the facts – Chinese private consumption has falling for decades (as has private consumption in most of Asia)
In 2006 the IMF did some specific research aimed at trying to understand the trends and drivers of Private Consumption in Emerging Asia. They were particularly concerned with the falling trend in China.
Source: IMF, Asia and Pacific Regional Outlook, Private Consumption in Emerging Asia, Sept 2006, page 59
More recent data from the Asian development bank indicates this trend has been continuing – the data that underpins the figure that breaks down the components of GDP combines private and government consumption into a gross consumption figure. This has fallen from 57% to 51.3% predominantly because of falling consumer spending.
Economic growth data shows that private consumption growth has contributed a steady but declining share of the total increase in annual growth rate of 2.7% points. A growth in the contributions by net exports and government consumption has offset the decline in contribution by investment.
So what has been driving this fall in private consumption and can we expect to see it turned around in the very short term?
Decreased consumption means increased saving. Why have the Chinese saved more? What has changed? The suggestion is that there have been two big changes to life in China that have driven the need for the people to increase their savings rate. The first is the breakdown of state supplied services – medical, educational, and pension costs that used to be met by the communist state now needs to be paid for by the people. They are saving to be able to afford to be able to afford to pay for future education and health bills.
The second is the one child policy. The argument is that people in rural economies usually have more children than people in urban communities because in rural communities children are an asset that can do work and provide protection in old age. In urbanised communities children no longer contribute economically, instead they become a financial drain. For the rural community, the one child policy means that people now have to rely on personal savings rather than children to provide for them in old age.
My argument is that none of the factors that has driven the Chinese to save more has changed enough or is amenable to fast change. Moreover, even if the government were to instantly reverse the one child policy and re-institute free education and health, we would not see an instant transformation of Chinese into consumers. This is not a computer game where you change the rules and people instantly change.