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Rediff.com  » Business » The new Chinese consumer

The new Chinese consumer

By Matei Mihalca
February 09, 2004 10:38 IST
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There is much talk about the rise of a new consumer class in China, just as in India. The spending habits of the new Chinese consumers are more liberal than those of their savings-minded parents.

The new consumers are trendy. They have white-collar jobs. They own an apartment and a car. They travel abroad. They hang out in shopping malls and bars.

They are featured in international magazine stories about 'The New China' or 'The New Asia.'

As with many magazine stories, there is a grain of truth to this phenomenon, but the sensationalist tone masks a less glamourous reality: while GM is beginning to produce Cadillacs in China for domestic consumption, the prospective buyers are only a small part of the overall economy.

In the composition of China's GDP, consumption is dwarfed by exports and fixed income investment.

Nevertheless, China's per capita GDP passed the threshold of a thousand dollars last year, and in purchasing power parity (PPP) terms the figure is four times higher. In China's coastal urban centres, the figure is much higher still.

This represents staggering progress, and China may have passed a critical inflection point. In 1978, when China's reforms began, India was ahead in per capita GDP terms; today, the positions are reversed. Going forward, growth may accelerate further.

Japan reached a thousand US dollars in nominal per capita GDP only as recently as 1965, though the figure meant more then than it does today in PPP terms.

Japan's per capita GDP is now over $34,000, though, as opposed to China, its PPP number is lower.

But for all of China's new wealth, there are large sections of the population for whom living standards have not been improving, such as industrial workers.

In Guangdong Province, China's export engine, the factory wage has been between $1.7-2.3 a day for the past decade and that amount evidently buys less today than it did ten years ago.

Why? The lack of real unions and, above all, the existence of millions of would-be workers in China's hinterland have kept upward pressures on industrial wages in check.

This may be why the grim tales of exploitation  --  such as the article comparing Guangdong with Britain during the Industrial Revolution which appeared in The New York Times on January 29  --  are missing the point.

The lives of factory workers in contemporary China are hard, to be sure, but it is not the same workers who have been oppressed in Guangdong for the past ten years.

Rather, the labour pool is renewed periodically, and ex-workers return enriched to the countryside where they start new businesses.

Nevertheless, there is a huge difference between the grim landscapes of China's industrial heartland and the world of Starbucks coffee shops in the country's increasingly glamourous urban centers.

There, you will find a local Chinese human resources director working for a multinational and earning between $100-150,000 a year.

A chief financial officer can make in excess of $200,000 a year, and the general manager of China operations, also local, gets paid $300,000.

There is a limited pool of qualified people from which multinationals can select such talent.

In the eyes of these employers, the ability to communicate effectively, both locally and with the corporate headquarters overseas, warrants such compensation.

But compensation levels in urban China today are high throughout the organisational ladder. A bilingual executive assistant earns at least $5,000 a year, and as much as $10,000 if she is very good.

China may be cheap in terms of low-end labour, but when Chinese university graduates begin work at a foreign company, they can expect a salary of $250-350 a month.

If they have a profile that is in high demand (typically good English and academic results), they will have multiple offers and very likely secure double the compensation. After all, $500-700 a month is not a great deal of money to many foreign companies.

The trouble is, a pattern is set: companies will continue to offer significant pay increases, even doubling compensation, every time a person moves.

Individuals come to expect it, companies tolerate it, and in many cases have no other choice if they really want someone.

Local companies can't compete with foreign enterprises in terms of hard-cash compensation.

But they can offer benefits that often go above and beyond salaried compensation at a multinational: company cars, flats, holidays, tax assistance, or expense accounts that can exceed $100,000 a year.

Many senior employees at local Chinese companies are not tempted by fancy-sounding jobs at foreign firms when they know that those firms cannot afford such largesse.

In short, the nominal average urban wage in China has been growing at 10 per cent CAGR for the last five years  --  this in a deflationary environment!

The money is mostly spent on housing, home appliances, tourism and cars. Most of China's 160 million urban families now own residential property. Even in the countryside, white-goods penetration is almost universal.

The impact of free-spending Chinese tourists on places as diverse as Hong Kong, Thailand and Paris cannot be underestimated. As for cars, China's roads are choked with traffic.

Imagine if China's car ownership rate grows from under 2 per cent today to the 50 per cent levels found in the US and Germany.

This growth in consumption has been mostly without the benefit of credit, which has fuelled China's fixed asset investment spree. Property buyers do take mortgages, but to a lesser extent than in the West. Consumer loans account for only 7 per cent of bank lending.

Teaching Chinese consumers about the benefits of credit has Chinese banks, which seek better assets than corporate loans, and western personal finance firms, salivating.

China has only 25 million credit cards. But Visa says there are already 60 million people in its target market of people who make more than $300 a month.

China is a tale of several economies, then: one is rural China, a place where 800 million people live. Life there got better quickly after 1978, but living standards stagnated recently.

Rising food prices in China in recent months may signal the beginning of a redistribution of wealth from the cities to the countryside. Rural China feeds people to China's export machine. This machine is a tough place to be, but stints can be relatively short and rewarding.

Finally, there are the urban cities along China's coast and increasingly inland. Louis Vuitton's new stores in China include one in Chengdu, a city of 10 million in Sichuan Province that has a Sheraton hotel and facilities from Intel, Motorola, and Eastman Kodak.

This picture is not without conflict but as long as there is more opportunity for all, the gap between the rich and poor in China is not likely to explode.

The prospect of wealth is, at least for now, helping to diffuse social tension. There is a belief outside China that a dramatic upheaval may destroy, or at least impact, China's economic miracle. This is unlikely.

Those who believe that a strong authoritarian government has kept conflicts hidden from view are also wrong.

Up close, Chinese society is surprisingly pluralistic and hence stable  --  it could not have otherwise existed in its present form for a quarter of a century.

Curiously, there is an organic character to China's polity even in the absence of democratic mechanisms. So, yes, the new middle-class will likely aspire to protect its gains.

Yes, workers may revolt  --  they already do. But revolution is not about to happen. In a strange way, the new consumer is indeed the representative of new China.

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