The Chinese consumer pitifully failed to replace the American one. Despite good intentions, over the years Chinese spending declined with regard to its GDP. Its share was 37% last year, 35% in 2008, and 48% back in 1994. Consumption rose in absolute terms, but less than the GDP did. Savings, conversely, were almost half of the national wealth in 2003, a huge leap forward compared to 27% of 1998. In the same years, the equivalent values in the US were respectively 4 and 5%.
After the crisis started three years ago, times looked mature for the Chinese consumption to emerge. That was a desire for the international community, worried about the gigantic trade surplus of China and willing to find another driver for the global recovery. In addition, a “domestic lead growth” is deemed more appropriate to the size of the Chinese economy, at least accordingly to a widespread opinion in the country. A more balanced economy is seen as a signal of a well-structured society.
But this goal was not achieved. The modest result shows not only the preference for saving is difficult to eradicate, but confirms that the growing profits of the State Owned Enterprise (SOEs) are not fully distributed to the social fabric. Individuals and families have to spend to improve their quality of life. Still, prudence prevails in China because its welfare is uncertain, costs for education are on the rise, and inflation is a constant threat. Hence, general consumption grows, but less than expected. More importantly, the SOEs have proved to be untouched by Beijing orders to distribute their dividends. In reality, dividends are invested in advance disguised as funds for the real estate industry or for supplying credit to the cash-stripped SMEs.
The SOEs are a pillar of old China. Established with socialist criteria, SOEs are now converted to privately- run companies. They have access to credit and strong influence on local Governments. They hold 70% of the profits of listed companies, while their weight on the economic scene grows consistently at the expense of SMEs. While the country seems headed towards a credit crunch, the SOEs enjoy a lucrative arbitrage, since they loan funds from official channels at 7% and lend at sometimes 40% of interest rate.
To cater the needs of the investors, savings are still the main source. Ironically, the Government knows that to improve the competitiveness of the investments, new investments in different fields are necessary. Modern technologies, education, research, industrial automation, services should be even more encouraged. But China seems tied to an old model, base on heavy investments on industries already mature. An overcapacity for cement, steel, aluminum, and automotive is obvious. Investment in infrastructures is unstoppable. As a conclusion, the individuals’ saving finance is an antiquate and less profitable model.
Many in China are now openly questioning this situation. Micro blogs ask why so much money has been spent to build a high-speed railway system, which proved to be expensive and unsecure. A strong debate emerged, both in the academia and the public opinion, about the irrational use of saving which at the end still favors the traditional circles, whose opacity hinders a more productive use of the resources. Mr. Wang’s sacrifice not to spend money seems useless. It neither finances a more modern society, nor replaces, on the international scene, Mr. Smith’s reduced consumption.
The macroeconomic standing and forecasts are still good in China, but the access to credit is a lingering problem. The country needs continuous supply of money to maintain consistent growth, but a quantitative growth is no longer sufficient. If the knot is not untied, the ultimate resource Beijing can rely on is its forex reserves.