Two More Myths About Business in China

This commentary originally appeared in Forbes .

When President Barack Obama arrives in China for his first official visit next week, he will find a very different nation from the one President George W. Bush first went to almost a decade ago. No longer is China a net recipient of aid. On Sunday it promised $10 billion in loans to Africa and forgave the debts of several countries. Another hundred million Chinese have been pulled out of poverty, and the nation is now the world's second-largest market for luxury items. Consumers buy $6.5 billion worth every year.

The desperation that marked the lives of many Chinese over the last century is gone. The Pew Center recently found that 86% of Chinese are happy with the direction in which the government is taking the country. My firm, the China Market Research Group, has found that 80% of Chinese under the age of 32 are confident and optimistic about their futures, despite the financial crisis, and they say they expect to spend at least 10% more in the next six months than they did in the last half year.

I recently wrote "Three Myths About Business in China," about things almost everyone mistakenly believes are true: that China's economy is export-led, that the country has a limitless supply of cheap labor and that connections mean everything there. China is changing quickly. As President Obama arrives, he and America's business leaders need to keep in mind two more myths about business in China that no one should fall for:

Myth No. 4: Chinese are culturally heavy savers.

Obama will likely press China to implement policies to reduce its savings rates, following the line taken by Treasury Secretary Timothy Geithner when he visited in May. However, Chinese people are already saving less and less.

Many economists argue that Chinese people are culturally bred to be heavy savers. They say that Chinese tuck away 40% of their incomes and refuse to buy on credit. But that just isn't true anymore.

It is true that Chinese over the age of 50 often save 50% or more of what they make, because they worry about soaring medical costs and weak pension systems. However, younger Chinese like to spend. China's traditional high savings rates are more a function of poverty than of a cultural aversion to spending. The lack of buying on credit results more from a weak consumer finance system than anything else.

The number of credit cards in use in China rose from 13 million in 2005 to 180 million by the end of 2009, and that growth was fueled largely by younger consumers. Despite the financial crisis, we expect the number of cards to grow 25% a year for the next three years, as consumers demand them and the financial system becomes more consumer-oriented and less reliant on servicing state-run enterprises.

We have interviewed several thousand Chinese under the age of 32 in 15 cities about savings. Our findings suggest they have savings rates near zero. A combination of optimism about their futures and impatience to enjoy life now leads many to buy on credit.

Take Anna, a typical 24-year-old Shanghai woman we tracked. She earns $700 a month as a marketing analyst and has three credit cards. She lives at home with her parents, who provide her food and housing. Because she has few costs at home, she spends her entire salary "enjoying life." She dines with friends in restaurants like Yum Brands' (YUM) Pizza Hut (a higher-end chain in China than in the U.S.) and gets pedicures weekly. She buys cosmetics from Estée Lauder (EL) and clothes from Zara and Uniqlo. She has a cracked Apple (AAPL) iPhone. She travels twice a year on vacation, both within China and abroad to places like Malaysia. She saves nothing, because, as she says, "I want to enjoy life now before I get old. My salary keeps rising, and spending will help me get the career I want."

Companies need to understand that their core target markets may be years or even decades younger in China than elsewhere. China's overall household savings rate is staying the same so far, but that is because of the elderly. The situation will change as younger Chinese take on more and more consumer credit.

Myth No. 5: Chinese hate the one-child policy.

Inevitably, as Obama arrives, he will be pressured to criticize China on human rights matters, including the one-child policy it implemented in the late 1970s. Though the policy caused difficulties in the early years, when people relied more on their offspring in old age and when premature death among children was common, it is now largely supported by urban Chinese. It remains less popular in poverty-stricken rural areas, however.

In fact, the government, worried about an aging population, is encouraging urban couples who are both only children to have two children themselves. Yet there have been few takers. Many parents don't want to assume the costs of private schools and extracurricular activities like piano lessons for multiple kids. They would rather focus on rearing and spoiling one child, as they were reared and spoiled when they grew up.

Moreover, many women no longer want to take a break from their careers, and many are too spoiled themselves to make the sacrifices necessary to care for multiple children. Grandparents commonly take care of grandchildren while both parents work.

Part of the reason for this is that the one-child policy created gender equality in urban areas. Families now place their love and hopes on daughters, not just on sons who can till the fields. As I wrote in"China's New Purchasing Powerhouse: Women," women now bring in nearly 50% of household income. Many are so focused on their careers that they don't want to be homemakers. Nannies cost only $200 a month; therefore much child-rearing is outsourced while mothers work late and party.

Younger Chinese tend to be optimistic and idealistic. They have very different saving and spending habits from older Chinese. It is almost as if there were two countries within one, a country that vividly remembers the receding horrors of the past and another land that has seen nothing but three decades of unparalleled economic growth. As Obama comes to China, it is the latter group's attitudes and hopes that he--and all of American business--should watch most carefully.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.

Disclosure: none

Comments

[semuren:]

"The desperation that marked the lives of many Chinese over the last century is gone. "

Sorry, but that is BS. I have lived in China for about 10 years and there are still many people whose lives are filled with desperation. Sure, over all things are much better, economically, than they have been, but statements like that above betray a truly superficial knowledge of the country.

I think I will never forget the man in line behind me Peking Union Medical Center in Beijing. My wife, father-in-law and I had all gone there at about 4AM to stand in line to get an appointment for my wife. Of the three of us one got an appointment. But the man in line behind me, like me did not get an appointment. I do not know his story. Maybe he came from somewhere far from Beijing or maybe not, but he simply lost it when he realized that he was not going to be able to see the doctor. In a way it was annoying. So many other were in his same shoes. But I can see why he started to scream and shout; why he simply could not accept that he, or whoever in his family was in need, was simply not going to have a chance to get medical care.

That man felt desperation. No doubt about it. We got an appointment and my wife went on to get needed surgery. But if we had not I have the financial and citizenship status to take my wife to Bangkok or the US and get proper medical care. Most Chinese are not in that position.

Sure things here are better than they have been in the past but it is not as rosy as analysts of the urban middle class consumer might have you believe.

Nov 13 09:54 AM

[semuren:]

This author does not understand the real meaning of saving rate. If you want a much less superficial understanding of how this concept works I suggest Mike Pettis's blog China Financial Markets. Pettis explains that the "savings" of households are not really a choice to put money in the bank per se but a function of an industrial policy that subsidizes capital, energy, etc for SOEs and large connected enterprises though such state directed policies as the overvalued currency, direct subsidies, low interest rates, large interest rate spreads and low wage growth.

No doubt what the author says about young spenders is true. In Chinese they are called the 月光族, the tribe that spends all their monthly income, but that doesn't matter because voluntary household saving are NOT the reason for China's high saving rate. Rather it is industrial policy that, in effect, taxes households to fund investment in export, manufacturing and infrastructure. Often such investments are actually value destroying, but they do make the books look good in the short term.

Nov 13 10:04 AM

[huangthomas:]

The author has a tendency to use anecdotal evidence to generalize to the entire society. It is not a scientific study of the society, it is simply a story telling of subjective opinions. The story of Anna, she used to live in Tokyo, now move to Shanghai, is an example. How representative is she for Chinese? There are 800mill rural resident in China. They are completely forgotten by the author

Nov 13 10:51 AM

[NoGambler:]

Thanks for a useful article.

If the move by the young to credit is certain, then credit card offerings by banks should produce profits for investors.

Thus ETFs with heavy holdings in financial services should do well in the years ahead. It won't matter if the banks are state controlled, in my opinion.

One possibility is FXI. Any other ETF ideas, anyone?

Nov 13 11:41 AM

[Rokjok777:]

I think the most interesting fact from this article is the fact that Anna is a marketing analyst, probably a pretty good one, and she earns $700 per month.
Wake up folks, the global standard of living is leveling out, rising in the developing world, and ________________ in the developed world (fill in the blank).

Nov 13 03:01 PM

[HaavBline:]

Like most things, standards of 'desperation' is only relative. Since you have only been to China for 10 years, you have no idea how low standards of 'desperation' could be thorough most of last century in China.

From the eyes of most Chinese who suffered through last century's desperate periods of imperial collapse, warlordism, Japanese invation, civil wars, 'great-leap forward' and cultural revolutions, you may sound like a cry baby.


On Nov 13 09:54 AM semuren wrote:

> "The desperation that marked the lives of many Chinese over the last
> century is gone. "
>
> Sorry, but that is BS. I have lived in China for about 10 years and
> there are still many people whose lives are filled with desperation.
> Sure, over all things are much better, economically, than they have
> been, but statements like that above betray a truly superficial knowledge
> of the country.
>
> I think I will never forget the man in line behind me Peking Union
> Medical Center in Beijing. My wife, father-in-law and I had all gone
> there at about 4AM to stand in line to get an appointment for my
> wife. Of the three of us one got an appointment. But the man in line
> behind me, like me did not get an appointment. I do not know his
> story. Maybe he came from somewhere far from Beijing or maybe not,
> but he simply lost it when he realized that he was not going to be
> able to see the doctor. In a way it was annoying. So many other were
> in his same shoes. But I can see why he started to scream and shout;
> why he simply could not accept that he, or whoever in his family
> was in need, was simply not going to have a chance to get medical
> care.
>
> That man felt desperation. No doubt about it. We got an appointment
> and my wife went on to get needed surgery. But if we had not I have
> the financial and citizenship status to take my wife to Bangkok or
> the US and get proper medical care. Most Chinese are not in that
> position.
>
> Sure things here are better than they have been in the past but it
> is not as rosy as analysts of the urban middle class consumer might
> have you believe.

Nov 13 04:51 PM

[HaavBline:]

Your point may be correct. But Shaun Rein's observations are more useful for his target audience, which are foreign companies who wants to sell to China.

Pragmatically, China's rurual poor is simply not on the radar screen of these foreign companies.

On Nov 13 10:51 AM huangthomas wrote:

> The author has a tendency to use anecdotal evidence to generalize
> to the entire society. It is not a scientific study of the society,
> it is simply a story telling of subjective opinions. The story of
> Anna, she used to live in Tokyo, now move to Shanghai, is an example.
> How representative is she for Chinese? There are 800mill rural resident
> in China. They are completely forgotten by the author

Nov 13 04:59 PM

[giulionegrini:]

Thanks for your article.
I am a American investor and I have analyzed the possibility of investing directly in Chinese company, but I have to see China 2020 before believe to all wonderful news regarding Chinese economy.

Nov 13 05:43 PM

[Gary A:]

The Chinese are consuming 30 percent of their GDP. That won't help the US out of this recession for years.

Nov 13 05:58 PM

[Shaun Rein:]

Semuren -- you cannot be serious. If you have lived in China for 10 years, you cannot honestly say that the quality of life for people here is not getting better... and certainly it is better than during the Civil War, Great Leap Forward, Cultural Revolution etc.

Is everything perfect? Absolutely not. And stories like the one you said about the hospital is heart-breaking and unfortunately true. One of my main goals in life is to set up hospitals/ clinics for poor people in China's countryside.

But net-net, the last several decades have been better for the majority of Chinese.

As for savings rates, most economists wrongly argue that Chinese save 40% of their earnings. Pettis has some decent points, though I disagree with most of his conclusions, I do respect him viewpoints. He is basing his conclusions on good facts, I just disagree with the interpretation. But I assure you I know what savings rates are.

Huangthoms -- you always like to criticize my pieces. that is fine. Good debate is always welcome. However, please re-read some of the pieces I write. It is clear in my latest that I am talking about urban youth. In commentaries that should be 600-1000 words I cannot write about every single segment. So I agree with you that rural youth are different.

Where did I ever say anything about Japan? Please keep up your criticism for sure, but please base it on what I actually write or which I omit because I am wrong... but not what I make clear I am not including.

By the way, I am certainly not using anecdotal evidence. For this piece, we drew upon several thousand interviews in 15 cities. Please...

Nogambler/ rokjok -- thanks for the comments. credit cards are booming. the key is which banks will benefit, which you should keep in mind when investing. china merchants bank is very consumer oriented, while ICBC and Bank of China get terrible satisfaction rates, especially BOChina.

Yes, more and more white collar executives are here. China is coming on strong and American firms need to adjust.

Haavbline -- thanks again for your kind comments (I noticed you have written several in the past). Thanks for clarifying my positions to the rest of us here and making it clearer what I am trying to say, with your own excellent insights. What do you do?

Giuliionginni -- I would strongly suggest you look at China for investing... be careful for sure ... but waiting until 2020... you might miss out. The numbers are positive here for sure... there are concerns in my mind about China's economy but overall it is positive here.

Gary a: right now chinese consumers accou nt for 1/3 of gdp.. we estimate that to hit 1/2 within 5 years.

Nov 13 08:50 PM

[chris coonan:]

I am in China, and am happy to be here. Life is much better than I imagined, and people seem happy. China is getting better and better everyday, and that is in contrast to the US/UK right now, unfortunately. So I must say that the glass is half full on the other side of the planet. I am happy for the Chinese, and hope that America can get the arrow pointing up again as well.

Nov 14 01:38 AM

[huangthomas:]

I want to make my criticism as transparent as possible, let me explain that "Anna move from Tokyo to Shanghai". Japanese sociologists describe the "Anna phenomenon" decades ago. The young single female get free loading of room and board from their parents and freely spending their income to promote their life style. The same phenomenon move from Tokyo to Shanghai or Beijing as the economy develops in China. I do not wish to impose any moral judgement to the life style, but I do call attention to the fact that the life style is not sustainable.

How about the unmarried single male? Well, they are not as lucky as single female. They have to consider three zi. They are fang-zi (house), che-zi (car) and ying-zi (silver ingot, which means money in China) before they can attract any niang-zi (young lady) to marry them. I don't really care how and how much money Anna make. It is simply a social phenomenon that we have to pay attention to.

Nov 14 02:14 AM

[Ricard:]

I think your myth #4 is tied to disposable income (disposable in this sense to include basic life necessities, like basic food, water, shelter, and security) - as it increases, savings as a percentage of income would (almost) naturally decrease. Still, I think it is dangerous to unsubscribe to this point, even if it is a 'myth' to be debunked. I think one of the main problems in the American economy is the relaxing of the propensity to save, so much so that it has turned toxic. Given the travesty of the finances of your typical American household, I find it almost immoral to advocate spending more instead of saving less.

Nov 14 05:22 AM

[bluesky123:]

I find Shaun's articles educational and informative. Any article that gives a western reader who has not had the opportunity to visit or work in China a window on everyday China life is of interest to me. I'm interested in the macro picture and in what ordinary Chinese people are doing, thinking, talking about, what's important to them, their daily struggles, how ordinary entrepreneurs bump up against the state etc. I was an exchange student in Japan and had a wonderful experience. The Japanese are a very gracious people. The description of Anna made me remember many Japanese women I met in Tokyo who had a similar lifestyle to Anna in Shanghai.

Nov 14 05:27 AM

[Ricard:]

"...women now bring in nearly 50% of household income. "

This would be huge, if true. Women's rights advocates around the world would be in awe if the world's most populous nation was able to break this glass ceiling.

Given the significance, I will insist on at the very least some solid statistical analysis before subscribing to this 'fact'.

Nov 14 05:33 AM

[Ricard:]

If YOU are correct, then what Shaun Rein is doing is exporting the misbegotten policies that got America to where it is today to China.


On Nov 13 04:59 PM HaavBline wrote:

> Your point may be correct. But Shaun Rein's observations are more
> useful for his target audience, which are foreign companies who wants
> to sell to China.
>
> Pragmatically, China's rurual poor is simply not on the radar screen
> of these foreign companies.
>
> On Nov 13 10:51 AM huangthomas wrote:

Nov 14 05:43 AM

[Nikola:]

I don't understand. I have never had to go wait in line at 4am to see a doctor, whether it was at Beijing University Third Hospital, China Japan Friendship Hospital or Beijing United or any number of random hospitals I visited over the years here in Beijing. Wait in line sure, but never more than 30 minutes. I think I waited an hour once.

And you can get American quality health care in Beijing if you are willing to pay US prices. But even at public hospitals I've received decent service, though crowds were bigger and the wait longer. But a doctor visit was $1 USD.

Maybe you were trying to see a particular specialist? I've heard people wait a long time to see a particular doctor that has a reputation. But you can't conclude that he "couldn't get medical care." He could have gotten medical care in a lot of other places in Beijing.

On Nov 13 09:54 AM semuren wrote:
> I think I will never forget the man in line behind me Peking Union
> Medical Center in Beijing. My wife, father-in-law and I had all
> gone there at about 4AM to stand in line to get an appointment for
> my wife.

Nov 14 06:12 AM

[AxIt:]

Here you are one more anecdote. Some time ago I was visiting one of my clients. You may know the name: Ferrari, the luxury cars. Moving around the buildings I noticed a big new plant that was being built at that time.
I commented: "It looks that business is going well if you are building this new plant, isn't it?".
My host replied: "Absolutely. This new plant will be dedicated to production for China".

WAKE UP guys. The world is changing, and is changing quickly.

Nov 14 07:03 AM

[The shark:]

Hi,

I am a South African who for my many sins has both traveled and undertaken various business dealings in many parts of the world. I have first hand experience of both worlds - the developed and the developing. In 1993 I structured a JV in China - just as China was re-engaging with the West. It still amazes me how business people in the West (particularly Americans) have little real understanding of "things" beyond their own immediate experiences. This is a massive subject and beyond the scope of this response.
However, at a macro level please bear in mind that China is currently controlled by a "benevolent dictatorship" within which all things both good and bad are possible. But lets assume for the sake of this response the intent is "broadly good". Unlike Western democracy the invisible hand of the "benevolent dictatorship" and particular in the Chinese case given their massive access to Capital has the infinite ability to stimulate and grow the sustainability of a middle / upper class. The proportionality of which given their demographics the world has yet to witness. So provided the "dictatorship" remains benevolent for the majority of it's population and intent remains within reasonable deliverables China can achieve in the next 20-30 years the impossible when viewed through a Western democracy perspective. The actual data in the short term is of little consequence to the medium to longer term reality. Therefore, whilst you can try to get your head around the day-to-day trend improbable - none of which will ever make sense to you - nor should they given that democracy as we know it is currently failing the broader populations and is therefore not relevant as a "road map" in terms of China's future development - and bear in mind time perspectives - in the West it is about next week, next month - whereas the Chinese culture is next 50 years - this time frame alone enables very different approaches in shorter term reality.

I therefore suggest that the potential for social unrest should the "benevolence" be forced into a "military styled" dictatorship is the only real variable that will disrupt China's medium to longer term dominance of the global economic world. Once again this is a bigger subject of discussion than this response allows but I would urge you to view China from a "Chinese perspective" and not a Western mindset - if you do the inevitability in the shift of power will be more obvious.

ps The danger for the West is that Asia (lead by China) internalises Regionally at the exclusion of the West - it is therefore critically important that the West keep Asia and particularly China in the "loop". Short term gains by the US (in particular) by devaluing the USD to encourage exports and reduce China imports shifts the world trade dynamic that encourages China to internailse (at a faster rate) at the exclusion or at significantly reduced dependence on the West's "consumer market". If this happens then the current, much needed re-ordering of economic and social re-alignments in will suffer disproportionately and possibly stall - the Roman Empire, the British Empire etc would never end? So they thought!

Nov 14 07:25 AM

[Ben Gee:]

In China the glass is half full, in the West, the same glass is half emty. In the West, the average imcome is about $ 40000 a year, in China it is about $ 4000. Why is it that 80% of Chinese a relatively satisfied and much less people are satisfied in the West?
In the next 10 years, Chinese authorities will spend heavily in health care, UI, and pension. For the fist time in 5000 years, Chinese farmers will be paying no agricultural taxes. Improvements are coming slowly but surey.
Any one criticise China's one child policy want China to have 300 million more mouths to feed. Do they want to see people starve? Can China feed 300 million more people? What is theor motive?

Nov 14 11:33 AM

[Monkey Man:]

Regarding "Myth" 4 about savings rate, you are referring to a demographic with relatively limited earnings and thus even if they were to save 40% of their paycheck every month, that wouldn't amount to much anyway. However, when you look at wealthier Chinese (and yes, wealthier Chinese obviously tend to be older on average), the savings culture is definitely not a myth. This begs the question: is this propensity to save a thing of the past and that younger folks today will continue to be big spenders as they grow old (as the author is suggesting)? I think spending will certainly and gradually become more and more liberal going forward but high savings rates will be here to stay for some time (probably longer than the author's target audience will be willing to wait). A key consideration missing from this analysis is that there are practical reasons (ignoring for now Chinese tradition/culture, which surely isn't a myth but is difficult for foreigners to grasp and thus is easily written off as outdated) for why the overall savings rate in China is indeed very high, such as the lack of a social safety net in the form of universal healthcare coverage (China is undergoing healthcare reforms to eventually address this), welfare benefits, etc. that are typically found in more developed countries. The narrow demographic referred to in this article is benefiting from a "safety net" provided by their parents/grandparents but what happens if/when they finally make some real money and decide to get out of the house and create a life for themselves? They're going to start saving like their parents did and like their parents' parents did, and... you get the point.

Regarding "Myth" 5, who cares?

Nov 14 12:25 PM

[JMBishop:]

Is China still a country with an economy that is centrally controlled by a single political party with a founding ideology in Maoist thought influenced my Marxist-Leninist rhetoric? Or, as in the United States, has political orientation become irrelevant, and as in the United States is it now a country with an economy that is centrally controlled by its investment banking industry? More simply put, haven't all political systems the world over been subverted by the multinational financial system? Aren't we all yellow dog-capitalist road-boot lickers now?

Nov 14 12:39 PM

[jimmy46:]

Savings is more than what individuals sock away.

When workers are underpaid,
either the employer or the government is "saving".

GDP minus consumption is a better indicator.
And by that measure, China is saving a lot.

Nov 14 01:46 PM

[Alphameister:]

I appreciate your glass-half-full articles about China, Shaun. While I read all the glass-half-empty articles about China by Pettis, I think your overall perspective of the investment potential within that huge and rapidly growing economy is much more on target and useful. As has already been commented, poverty is relative. Most people in this world would consider themselves incredibly fortunate to be poor in America, a classification that usuallly includes such necessities of life as a TV, a video-game system, a microwave and other household appliances, and so on. "The poor will be with us always," for without them how would the bureaucrats paid to manage them and to keep them in poverty earn a living? China is following essentially the same path to prosperity that has been followed in the U.S. and all developed economies. And it seems increasingly obvious to me that the "benevolent dictators" in China are better read and more drawn to free-market theory than are the dolts who central plan for us in the U.S.

Nov 14 01:51 PM

[bobbybutte:]

as a person who is financially independent solely from dividend investing let me comment

Understand something china imports certain items but do you think for one minute that all the useless high margin stuff they import here would be bought by asian people

They would not be

Nov 14 02:04 PM

[bd1990:]

I can't agree more with your analysis. However, I am not sure how correct those data on credit card are. As I know, many so-called "credit cards" in China are actually debit card, there is zero credit in them.


"The number of credit cards in use in China rose from 13 million in 2005 to 180 million by the end of 2009, and that growth was fueled largely by younger consumers. Despite the financial crisis, we expect the number of cards to grow 25% a year for the next three years, as consumers demand them and the financial system becomes more consumer-oriented and less reliant on servicing state-run enterprises."

Nov 14 02:55 PM

[Tony Daltorio:]

You need to quit paying attention to Michael Pettis who has been bearish on China since the time of the emperors. Anyone who listens to him will never make any money.


On Nov 13 10:04 AM semuren wrote:

> This author does not understand the real meaning of saving rate.
> If you want a much less superficial understanding of how this concept
> works I suggest Mike Pettis's blog China Financial Markets. Pettis
> explains that the "savings" of households are not really a choice
> to put money in the bank per se but a function of an industrial policy
> that subsidizes capital, energy, etc for SOEs and large connected
> enterprises though such state directed policies as the overvalued
> currency, direct subsidies, low interest rates, large interest rate
> spreads and low wage growth.
>
> No doubt what the author says about young spenders is true. In Chinese
> they are called the 月光族, the tribe that spends all their monthly
> income, but that doesn't matter because voluntary household saving
> are NOT the reason for China's high saving rate. Rather it is industrial
> policy that, in effect, taxes households to fund investment in export,
> manufacturing and infrastructure. Often such investments are actually
> value destroying, but they do make the books look good in the short
> term.

Nov 14 03:37 PM

[TeresaE:]

Great article.

I had the opportunity to work with 2 or 3 Chinese citizens here on H1-B visas at the turn of the century. They told me then that their families and friends continuously asked for luxury goods from them. Things have apparently changed.

I feel that China is entering the glow period of their industrial revolution, lots of jobs, lots of money, lots of spending and consumerism. China has become America with a few differences.

In two generations even the rural poor will think and behave the way of the city youth today. That happened here first too. China's industries are creating a consumer economy in the exact same way that our early industrialists did.

Sadly, for the US, China's middle class is larger than our entire population, if they stay self stocked they won't need us much anymore. Other than our resources. Which is exactly what we finagle from less developed countries now.

As for investing, the Chinese people may be freer in thoughts and more optimistic, but I still do not trust a government that executes businessmen. But, that's just my doubting nature.

Nice article and thank you.

Nov 14 04:13 PM

[Graham and ...:]

China is not a "bad" thing to doubt.

In my parents' time, they executed people for just being of the "business" CLASS.

Which is why they left (just in time).


On Nov 14 04:13 PM TeresaE wrote:

> Great article.
>
> I had the opportunity to work with 2 or 3 Chinese citizens here on
> H1-B visas at the turn of the century. They told me then that their
> families and friends continuously asked for luxury goods from them.
> Things have apparently changed.
>
> I feel that China is entering the glow period of their industrial
> revolution, lots of jobs, lots of money, lots of spending and consumerism.
> China has become America with a few differences.
>
> In two generations even the rural poor will think and behave the
> way of the city youth today. That happened here first too. China's
> industries are creating a consumer economy in the exact same way
> that our early industrialists did.
>
> Sadly, for the US, China's middle class is larger than our entire
> population, if they stay self stocked they won't need us much anymore.
> Other than our resources. Which is exactly what we finagle from
> less developed countries now.
>
> As for investing, the Chinese people may be freer in thoughts and
> more optimistic, but I still do not trust a government that executes
> businessmen. But, that's just my doubting nature.
>
> Nice article and thank you.

Nov 14 04:40 PM

[Shaun Rein:]

Chris Coonan/BlueSky/ Axit/Shark/ Nikola- Thanks for kind comments. I agree with you, just is getting to be a better and better place to live for just about everyone. I first came here in the mid-90s and the quality of life change is palpable. Sure, not everything is perfect but the key is that the trend is towards the better.

Ricard - I would actually say in urban areas (not rural) that women have more gender equality than just about anywhere in the world. They are becoming the major consumers as more jobs are created that are in the service sector. In fact, in many migrant households the women might be earning more. Foot massage (legitimate) masseuses make more than male counterparts as construction workers. I have written extensively in Forbes in the past on this that you can check out.

Huangthomas -- thx for comments and insights. Salaries keep going up so for now the lifestyle is sustainable for most... and these kids of sevearl sets of homes that will be given to them because of grandparents.

The issue is what happens id salaries don't keep going up. Then we would be in a serious problem.

Bengee- exactly. Life is definitely better for most Chinese. Investors need to look at who is optimistic. Optimism and confidence is a great indicator of how/ where one will spend. Investors should look at that.

Monkey Man -- thanks for comments but I slightly disagree. The average millionaire in China is 42 years old. Most are younger than that. Because of the Cultural Revolution, there is a lost generation of Chinese businessmen who missed out from around 45 to 65. Take a look at my piece in Forbes called Tap Into China's Swelling Consumer base. It looks at some of your criticisms.
www.forbes.com/2009/10...

Alphameister and Tony Daltorio - thanks for the kind comments. I am always very surprised at how pessimistic and bearish Pettis is. I respect him as he is basing his arguments on facts and knowledge but I just don't understand how he can possibly be so negative. There are problems here but nothing that is as disastrous as he makes out.

For me, most of the bears like Roubini or Roach are interesting reads but one should not get too influenced when making investment decisions. Darn it... the last year has been the best investing climate of all time if you had some cash and were not too scared. Baidu has quadrupled. Ctrip.

If you looked at the investing pieces I wrote specifically for Seeking Alpha a year ago and before, you would have made a lot of money.

BD1990 - thx for note. Yes, those rates I marked down are for true credit cards. There are actually about 1.2 billion debit cards in circulation in China.

TeresaE -- Thanks and I agree with you. Rural poor will quickly catch up and start to consume like urban ones. It is starting to happen. OUr research suggests that the most optimistic consumers are the ones in rural areas right now because they are working for companies (chinese) that have not been hit as hard by crisis and still have access to credit.

I do think that American firms that get this shift, say a YUM brands or PG, will benefit.

Graham -- never forget the past for sure. Hiistory is important to know. BUt don't get too stuck in it either. Your parents time in China is very different from today's China.

Nov 14 05:29 PM

[Monkey Man:]

Shaun, I think it's great that you are so responsive to comments on your article. I skimmed through the other Forbes article you mentioned, and I can agree with that one for the most part, but not sure what that article was meant to refute. I find it funny that those who support your views seem to have very limited knowledge about life in China (i.e. knowledge based on brief visits to China). But then again, I believe your articles are directed more towards companies who not only fail to understand the China market well but are basically clueless and thus would entertain purchasing your firm's market research. Thank you for helping me understand why so many foreigners (companies and individuals) fail to be successful in China: they are often given meaningless advice by "experts" who, while usually well-intentioned, don't really understand doing business in China. My advice to those truly serious about making money out here: learn to BOTH speak and read Mandarin and find out things for yourself.

Nov 14 10:41 PM

[User 500929:]

I've lived in China for around 9 years and Shaun's points are pretty much right on. If Obama or other politicians outside China don't understand how necessary and (overall) well implemented the one-child policy has been in China then they are truly mis-informed.

Nov 15 12:41 AM

[odin:]

The telling comment is: "I want to enjoy life now before I get old. My salary keeps rising, and spending will help me get the career I want."

Havent we heard this tune before? Perhaps in this country -- when a hourly wageearner gets the McMansion on a ARM? There are a lot of assumption this young lady is making about the future.

The standard of living is undoubtedly better than it was in the years past. How could it not be? China has grown its aggregate wealth (in latter years, at the expense of the deficit-producing nations) faster than its population. But the question we ask is not if things are better today but if they will be even better tomorrow to the extent that they satisfy people and keep those 86% people equally optimistic? Is this growth sustainable? There are vast expecations that underlie any rise like this. That is the disconnect between what the author is saying and the complaints about China. As news of this young lady's lifestyle and research from experts like Shaun reaches more and more people in China (including the rural areas), they, too, will want to dine at Pizza Hut and get weekly pedicures. Any departure from realizing those expectations is a recipe for unrest. Even with the breakneck current rate of growth, China adds 12M unemployed to its roll. This is not to compare to the level of un/underemployment in the past. Those people in the past had very different expectations for their future and hence did not think that a life spent never having eaten at PizzaHut was such a terrible thing.

Sure there has been growth...but has it resulted from wise investments?. I remember highways just outside of Beijing packed as far as the eye could see from trucks carrying construction equipment. Will the houses and offices that got built find occupants that justify the cost? Is the $200B being spent on railways similar to the money spent in the US on highways after WW2? Only time will tell. There are people, like Shaun, who are in a different profession and take the optimistic view. I ask, realistically speaking, what is the probability that they are wrong? And even if its low, what the cost of being wrong? I risk losing the upside (as I have this year) but I tend to err on the side of caution.


On Nov 14 02:14 AM huangthomas wrote:

> I want to make my criticism as transparent as possible, let me explain
> that "Anna move from Tokyo to Shanghai". Japanese sociologists describe
> the "Anna phenomenon" decades ago. The young single female get free
> loading of room and board from their parents and freely spending
> their income to promote their life style. The same phenomenon move
> from Tokyo to Shanghai or Beijing as the economy develops in China.
> I do not wish to impose any moral judgement to the life style, but
> I do call attention to the fact that the life style is not sustainable.
>
>
> How about the unmarried single male? Well, they are not as lucky
> as single female. They have to consider three zi. They are fang-zi
> (house), che-zi (car) and ying-zi (silver ingot, which means money
> in China) before they can attract any niang-zi (young lady) to marry
> them. I don't really care how and how much money Anna make. It is
> simply a social phenomenon that we have to pay attention to.

Nov 15 02:57 AM

[manya05:]

Sorry, but I do not buy this "China is doing great" line the article seems to paint. I do not see much in terms of long-term sustainability for the Chinese development model. Surprisingly for a Communist country, their greedy leadership has managed to create an incredibly unequal society, with a small sliver of the population enjoying the riches brought upon by opening to globalization, while a large mass remains very poor (true, not starving as 25 years ago, but living a sub-standard life, artificially depressed by a government that keeps a big chunk of what Chinese sweat produces). They are building a huge rich-poor gap that will eventually become a time bomb.

Further, even though the current trajectory they are on may persist for many years, I see no basis for long-term sustainability in their model. Most of what China produces is either a fake or a piece of junk. They would not compete effectively if it weren't for their monetary policy of depressing the yuan. As soon as their currency were allowed to float there would be multiple countries with the capability to compete with China with products of better quality, more solid and ethical business practices, and a competitive price. China's industrial production would fall off a cliff if they did not tinker with their currency.

Nov 15 08:29 AM

[James Lewis:]

Living standards have improved in almost every country in the world in the last 50-60 years. This is a consequence of the social, political, human, financial and innovation evolution. It is somewhat unfair to attribute the evolution solely on the Chinese government.

Shaun's main data set is in effect the lower/higher middle class and upper class in China. These people usually have favourable hukou and it is fair to say they have seen a huge increase in their living standard. The lower/under class in China has been left behind and it is fair to say there standard of living has only improved as a consequence of the evolution of the various aspects I described above. Which can not be atributed to government policy. These people were left behind and in effect used in order to develop China into the powerhouse it is today. Of course this is a normal consequence of development. Every country has gone through this process. The bottom of the hierarchy always gets a raw deal. This is the reason for many of the 'revolutions and peasant uprisings in history of the world as it has developed.

Real progess is being made in trying to improve living standards of the working/lower classes now in China. The central government is fully committed to this, but still is keeping wages down to avoid giving the lower class too much financial freedom. From a dvelopment perspective you need lots of cheap labour to develop the country. Progress is being made, it is too slow.

There is a two-tier system.
Things are great for some and terrible for others and te inequality divide in china is great.

However in summary Hu and Wen are making progress. In terms of Shaun assertion there is great opporutnity from selling goods to the Chinese, he is spot on. Getting market access however is harder.

Make no mistake the US government knows the many faces of China. Those who believe they are naive and ignorant are wrong. However their challenge to balance growth and exchange of benefits is very difficult especially as the stakes are so high.

Nov 15 10:37 AM

[JMBishop:]

Mr. Shark: Referring to your statement quoted below, may I suggest that allowing economies to internalize on a regional basis may be a good thing because it could lead to a long-term global economy that is completely sustainable both in terms of financial wealth and natural resources. There is no economic rule that says a succesful economy has to be financed by goods and services produced solely for global export. Westerners who are clammoring for a chunk of Asian wealth need to reject the new imperialist doctrine of "global free trade." I'm not advocating protectionism but rather sustainability. Every country in the world has abundant amounts of the exact same resource...human beings...homo sapiens sapiens...people. A nation's wealth is contained in its citizens. A country that sustains the economic welfare and social health of its citizens will always have something valuable for export whether it be goods or services.

"The danger for the West is that Asia (lead by China) internalises regionally at the exclusion of the West - it is therefore critically important that the West keep Asia and particularly China in the "loop". Short term gains by the US (in particular) by devaluing the USD to encourage exports and reduce China imports shifts the world trade dynamic that encourages China to internailse (at a faster rate) at the exclusion or at significantly reduced dependence on the West's "consumer market". If this happens then the current, much needed re-ordering of economic and social re-alignments in will suffer disproportionately and possibly stall - the Roman Empire, the British Empire etc would never end? So they thought!"

Nov 15 12:07 PM

[TPA:]

Shaun, I think that your sampling of citizens for your survey is skewed toward the upper class of Chinese society and/or you need to choose better examples for your articles. Most of the skepticism with this articles seem to stem from your conclusions generated by this Anna person.

Next time you're in a taxi, ask the driver how much she's able to save on a monthly basis and whether she spends every dime at Zara and on travel overseas. In fact, you can also ask her whether she's happy with her leadership or whether China's economic growth has helped her and her family or even whether the health care system is as broken as some would suggest. The good common folk at their income bracket probably represent a much, much larger swath of the Chinese population than Anna. Anna's 月光族 generation (or "moonlight tribe" in English) is a growing, but still very small, portion of the society.

But yes... I agree it is a good time for retailers to be entering China if they have not yet.

Nov 15 09:47 PM

[wfg:]

Having lived in China 3 years, teaching at first a Medical College in the north and currently teaching at a university in the west, I must concur with the main points he makes in this article.

I would also add, subjectively I notice that my students (aged 18 and 19) are mostly patriotic beyond anything I have ever witnesssed in any of the 30+ countries I have visited! They "know" their destiny in China is to become the world's rulers! And, they intend to exact some small measure of "revenge". By revenge, they intend to impress Chinese thinking on as much of the world as is possible. Secondly, they are nearly to a person, totally self-absorbed, selfish, lazy, arrogant and overly confident of their own unique value and worth in this world. They are, almost to a person, totally consumed with consumerism and me-ism. (at my school, girls outnumber boys 8:1. At least 90% of the girls contend they will have NO children as that would decrease their own standard of living, whether that is fiinancially or in terms of personal freedoms. Many even espouse they shall never marry as no "boy" is worthy of them, while they can make more than enough money on their own to live a very comfortable life without a husband. Furthermore, almost none of the girls have any idea of how to cook and no desire to learn. They intend to eat at restaurants forever, oblivious to the costs.) They live for the moment. They have almost NO concept of "the future". Saving for a "rainy day" is not even an option, it is an impossibility that a rainy day could ever arrive. I would hazard a guess, that by the time they become 4th year students, their "savings" rate is a negative rate. In fact, many if not most of the 1st year students go into a negative frame of mind by the end of their first year. Consumerism is indeed their mindset. Add in a very large dose of decadence and debauchery,and you have a clearer understanding of the true nature of these students. And, what does THAT portend for the future of the Red Dragon?

Nov 15 10:03 PM

[AxIt:]

I would invite you to reconsider the assertion that China is just a producer of "either a fake or a piece of junk". While I agree that many chinese products are low quality, your consideration refers to the past. May be ten years ago.
You should also see the other aspects of chinese business that tell another story.

The following are a few examples:

- China-based wind turbine firm A-Power Energy Generation Systems (NASDAQ:APWR) will lead the building of a huge wind farm in West Texas. It will cost as much sa $1.5 billion and could supply energy to nearly 180,000.

- China based Sinovac Biothech (Nasdaq:SVA) was the first company in the world to develop a vaccine for the H1N1 pandemic flu virus.

- Lenovo (HKG:0992) is one of the main players in consumer information technology today, whith a global PC market share of about 9% (HP doubles this figure at 20%)

There are many other similar examples that show that Chinese companies not just into low end retail products today.

Disclosure: long APWR and SVA.

On Nov 15 08:29 AM manya05 wrote:

> Sorry, but I do not buy this "China is doing great" line the article
> seems to paint. I do not see much in terms of long-term sustainability
> for the Chinese development model. Surprisingly for a Communist country,
> their greedy leadership has managed to create an incredibly unequal
> society, with a small sliver of the population enjoying the riches
> brought upon by opening to globalization, while a large mass remains
> very poor (true, not starving as 25 years ago, but living a sub-standard
> life, artificially depressed by a government that keeps a big chunk
> of what Chinese sweat produces). They are building a huge rich-poor
> gap that will eventually become a time bomb.
>
> Further, even though the current trajectory they are on may persist
> for many years, I see no basis for long-term sustainability in their
> model. Most of what China produces is either a fake or a piece of
> junk. They would not compete effectively if it weren't for their
> monetary policy of depressing the yuan. As soon as their currency
> were allowed to float there would be multiple countries with the
> capability to compete with China with products of better quality,
> more solid and ethical business practices, and a competitive price.
> China's industrial production would fall off a cliff if they did
> not tinker with their currency.

Nov 16 03:37 AM

[Econo:]

I'm a expat in Beijing and there are some things I want to say about this article:

1. for western people, this is a cheap place. I make 6800$ a month and it allows me to get some luxery here I wouldn't have at home.

2. I'm a Marketing Director and I know what my assistants make. That's between 500 and 1000$ a month (equal to 6 to 7 times as much in the US because of living standards).

3. For every person who makes a good living, there are at least 100 that have a hard time getting by. And everybody who does make a good living, is selling their soul to do so by working 14 to 16 hours a day at the office. (try to do this yourself for a month and tell me how you feel at the end of the month. Also note that most of them are alone and have nobody to talk to because these capitalistic foundations have made this place very indivudialistic).

4. Here everybody dreams of the western style of living. And to handle that dream, they buy a lot of western products which cost sometimes more than at home in the US! By buying these products, they think they buy some happyness. I think you can compare it to the gold rush at the beginning of the 20th century in the US. Everybody wants some gold, everybody knows about the stories of the billionaires and they think they can all be one.

I have a hard time adopting to this culture, and can't wait to get back home (in 2 years...). For me this feels like the biggest prison cell in the world where you can do almost everything you want, have whatever you want, but where you are put constantly in isolation.

Nov 16 04:12 AM

[coreopsis:]

How are things on the dirt road you live on? ;-)


On Nov 15 08:29 AM manya05 wrote:

> Sorry, but I do not buy this "China is doing great" line the article
> seems to paint. I do not see much in terms of long-term sustainability
> for the Chinese development model. Surprisingly for a Communist country,
> their greedy leadership has managed to create an incredibly unequal
> society, with a small sliver of the population enjoying the riches
> brought upon by opening to globalization, while a large mass remains
> very poor (true, not starving as 25 years ago, but living a sub-standard
> life, artificially depressed by a government that keeps a big chunk
> of what Chinese sweat produces). They are building a huge rich-poor
> gap that will eventually become a time bomb.
>
> Further, even though the current trajectory they are on may persist
> for many years, I see no basis for long-term sustainability in their
> model. Most of what China produces is either a fake or a piece of
> junk. They would not compete effectively if it weren't for their
> monetary policy of depressing the yuan. As soon as their currency
> were allowed to float there would be multiple countries with the
> capability to compete with China with products of better quality,
> more solid and ethical business practices, and a competitive price.
> China's industrial production would fall off a cliff if they did
> not tinker with their currency.

Nov 16 10:45 AM

[Mad Hedge F...:]

dfg I have long sat beside the table of Mckinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients. These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up, sadly letting my bacon and eggs grow cold and congeal. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China’s GDP will triple relative to our own from current levels. A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this doesn’t work, they have another $500 billion package sitting on the shelf. But with GDP of only $4.3 trillion today, don’t count on China bailing out our $14.4 trillion economy. China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC’s, and to live in big cities. Asia has a huge edge over the West with a very pro growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75 story skyscraper is going up there every three hours! Some 1,000 years ago, the Silk Road was the world’s major trade route, and today intra Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths. Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth. To me this all adds up to big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

Nov 16 05:36 PM