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How Much Consumerism Can China Afford?

A ChinaFile Conversation

This week, a blockbuster movie celebrating speedy cars and the racing life landed atop China’s box office. The Hollywood import Fast and Furious 7 grossed $63 million in one day (as reported by Bloomberg), the most-ever for a single title in that market. Even as the Chinese central government is trying to get the historically risk-averse Chinese people to stop saving so much and spend more of their money on things like movie tickets, to help move the nation from a manufacturing-led economy to one led by the power of the consumer, Beijing is also asking citizens to prepare for an economic slow-down. The Chinese Communist Party also continues to tout a two-year-old austerity campaign for influential elites, hitting many of them with anti-corruption charges that punish any show of material wealth, ill-begotten or not. Still, many Chinese are flouting socialist and Confucian values in favor of fun designer clothes, vacations (and homes) abroad, and yes, fast cars. How much can Chinese consumers afford to spend given the nation’s lack of a social safety net? Moreover, how much consumption can China’s environment handle and is there a magic number that signals China’s people are consuming enough to keep the economy from tanking without simultaneously killing themselves with pollution? What would need to happen to make that possible?—The Editors

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The figures China published this week confirm a couple of important trends: economic growth is continuing to slow down, and consumer spending is continuing to become a bigger part of the economy. Household consumption is doing relatively well, but we clearly are not seeing a new economic boom driven by the Chinese consumer. To explain why, I often find it useful to think of China as having not one economy, but two—let’s call them Industrial China and Consumer China.

In Industrial China, let’s put most of the things related to investment and construction. To throw up new buildings requires steel and cement, and to make steel and cement you need iron ore and electricity, and to generate electricity you need to burn coal. This chain of related businesses is at the heart of Industrial China, and it is primarily driven by corporate decisions about how much to invest in housing and infrastructure. In Consumer China, let’s put pretty much all consumer goods and services other than housing—groceries, travel, the Internet, and so forth. Consumer China tends to be much less volatile and cyclical than Industrial China, and is driven mainly by the decisions of individual households.

To simplify even further, the big story in the Chinese economy over the past decade was the boom in Industrial China, led by housing, with Consumer China tagging along. The big story over the next decade will be the decline of Industrial China, and the continued growth of Consumer China. Industrial China will falter largely because the demand for new housing and infrastructure in China is getting met, and is very unlikely to grow further from its current enormous size. Consumer China, however, is continuing to grow at a decent pace while this big adjustment is going on. But because the gains in Consumer China are not enough to offset the losses in Industrial China, overall economic growth will slow—as indeed it is already doing.

So why can’t Consumer China take up all the slack, and keep the country growing at 7-8%? One big reason is that Industrial China and Consumer China are in fact really just one economy, and are not isolated from each other. People who work in Industrial China—at steel plants, at construction sites—are going to see their income growth slow as their employers suffer, so they will not have as much money to spend in Consumer China. From the Chinese government’s perspective, this matters a lot, since it has promised it can maintain “medium-high” rates of economic growth despite the many challenges facing Industrial China. That could be tough.

For those outside China, though, the more urgent question is more likely to be how to cope with the ever-rising affluence and influence of Consumer China. Industrial China may be continuing to drag down the country’s overall growth rate, but meanwhile Consumer China is continuing to get steadily bigger. Already, the global travel industry is bursting at the seams trying to keep up with record numbers of Chinese traveling abroad. Global consumer products from mobile phones to movies are now designed and marketed in ways calculated to appeal to the Chinese buyer. Consumer China may not be booming as fast some of its boosters once hoped—but could the world really handle much faster growth?

In the short term, consumers will continue spending, and diversifying, creating new niche opportunities, both for domestic and foreign companies. But competition is still tough and innovation will be key to success—quality rather than sheer quantity. In the medium- to long-term, the question might be, “How much consumerism can China's environment afford?”—and the government, companies, and consumers will all have to balance growing consumerism and the need to improve environmental protection. Growing consumerism within China will also drive more overseas spending by Chinese people, both abroad and from within China. This will bring with it competition from Chinese companies into global markets, as we are already seeing, and opportunities for foreign companies to reach more Chinese, especially via online retail, without even necessarily being located inside China.