Column International Exchange 2009.12.17
While the world economy is shrinking, Chinese consumption is continuing to grow strongly. Accordingly, China continues its strong demand for Japanese products and services, such as automobiles, air conditioners, digital cameras, cosmetics, department stores, super markets, and convenience stores.
It is surprising, therefore, that many Japanese seem to think that Chinese consumption is weak. When I brief people about the Chinese economy, they often raise a question about weak consumption. This misconception probably derives from the fact that the proportion of consumption in GDP is relatively small (48.7% in 2007), while that of saving is high (51.3% for the same year.)
Is consumption really weak in China? The answer is NO. On the contrary, it has been growing strongly. This is obvious from macroeconomic indicators. This year, retail sales of social consumer goods (nominal base) were up 15.0% during the first and the second quarters respectively, and 15.3% in the third, as compared to the comparable quarters in 2008. During the same periods in 2009, the CPI was -0.6%, -1.5%, and -0.8% compared to 2008; therefore, the real consumption base grew much more in real terms than these indicators would suggest.
This strong growth is supported by the increase in income. From January to September this year, income grew 9.8% (10.5% real base) for city dwellers and 8.5% (9.2%) for farmers, as compared to 2008. This income increase has spurred a strong growth in consumption. In addition to salary, Chinese corporations provide their employees with other financial benefits, including expense accounts that are commonly used for personal dining. All this has contributed to a large increase in consumption.
Why is consumption less and savings more than half of China's GDP? This is because investment growth is more than the increase in consumption. In addition, China's strong growth has long been export and investment-led, so, each year growth rate of, fixed asset investments exceeded that in consumption. This has resulted in an increase in the investment component of GDP. Fixed asset investment (nominal) for January to September 2009 cumulative has increased 33.3% compared to 2008, largely surpassing the retail sales of social consumer goods (nominal) that was up 15.1%.
From 2005 to 2008, China's trade surplus continued to increase rapidly; however, before 2005, the surplus was not that large and the government was, at that time, focusing on strengthening the competitiveness of its exports. In the Pearl River Delta and the Yangtze River Delta, it focused on infrastructure investment, in addition to tax incentives. This resulted in high growth in fixed asset investments. These government policies succeeded in achieving high export and investment-led GDP growth, resulting in increases in income and consumption. Since last year, the world economy has been in recession and the Chinese government has turned to domestic demand-led growth. China has maintained its trade surplus, however, due to the competitiveness of its exports.
As for the savings rate, due to the reasons set forth above, corporations with an investment focus have high savings rates, and so do individuals. It is noted that individuals resort to increase their savings due to anxiety about their future on account of a broad dearth of social security measures. Another reason for the increase in savings is the rapid growth in income. Income for most individuals is continuing to increase 10% to 20% every year. Increase in consumption has not caught up with that of income. For example, if your income of 6 million yen were to increase by one million every year to reach 9 million, you are unlikely to immediately match your living standard, including in housing, clothing, food, and automobiles, to your new income level. So, the high income growth has resulted in higher saving rates.
After over a year since the Lehman Shock, the global economy is still stagnant but the return of the Chinese economy to a path of high growth is quite remarkable. This high growth is leading to continuing expansion of the consumer market. Japanese corporations in the consumer sector are gearing themselves up to meet the increase in demand by expanding their production capacities and speeding up store openings.