Why Is China Booming? Surprise, It’s Not the Stimulus

Launched amid much worldwide rejoicing when the financial crisis struck last year, China’s Rmb 4 trillion ($585 billion) stimulus package is given much of the credit for China’s continued strong economic performance this year. China’s GDP growth is likely to exceed 8%, and the domestic stock market is up by over 70% since the start of the year.

A Keynesian miracle? To read a lot of the financial commentary on China, you might well conclude this is so, that government spending has single-handedly kept the economy jaunty, while both firms and consumers sank into a deep funk. It’s a great story, and provides a simple explanation for how China dodged the bullets that struck all other major economies. Other countries looked on enviously, and urged China to continue the fiscal pump-priming to help out the overall world economy.

Problem is, the analysis is flawed. China’s stimulus plan is not all it’s cracked up to be. While the additional government spending has clearly played a part, it is not the only reason why China’s economy has remained so sound this year. The unsung heroes of China’s economic success this year are its ordinary consumers. It’s their continued confidence and increased spending that have really made the difference.

Economic statistics are notoriously iffy in China. The further one gets from the economic lever-pullers in Beijing, the harder it becomes to track economic activity. That’s another reason why the stimulus plan was so often singled out as the main spur to China’s growth. It’s easier to calculate how much additional the Chinese government is spending building expressways than it is to see how many pairs of socks or bowls of noodles Chinese are buying.

Another reason: a lot of the economic commentary comes from folks who believe that governments really are responsible for what happens, good and bad, in an economy. Again, it’s just so much simpler to view things this way, that powerful government men can pull out their checkbooks and spend their way to national prosperity. These are often the same people who will tell you, wrongly, that Roosevelt’s New Deal spending lifted the US out of Depression.

China’s supporters and detractors both give the government too much credit. There are those who are convinced China’s economic growth is all some kind of fraud, cooked up by the central government, and that once the extra government spending is dialed down, the economy is certain to crash.

Again, pure hogwash.

In China, the government rightly deserves credit for excellent economic management, for creating the circumstances, both marco and micro, that allow the Chinese economy to continue to thrive. I’ve said it frequently, including in public forums: China is the best-managed major economy in the world.

But, again, let’s also commend the country’s one-billion-plus consumers, too often seem as miserly skinflints, saving up all their money for their great-grandchildren’s rainy days. It just ain’t so. China’s consumers, with an ever-increasing choice of products, services and shops, are spending ever-increasing sums on improving the quality of their lives. Newer and better housing. New cars. Holidays. New wardrobes. You name it.

I see it every day here, the untethered exuberance of the Chinese consumer. It’s true that in the early part of this year, there was a relative lull. Back then, shops were working harder to attract customers, by putting a lot of their goods on sale at steep discounts. About four months ago, the situation began to change markedly. No more major knockdowns. Prices now all seem to carry list price, and the prices for many common consumer products are as high, or higher, than in the US.

Not much of this, it goes without saying, gets noticed by the world’s financial commentariat. Car sales in China are at an all-time high, and China is now the world’s largest car market. But, listen to the commentators, and they’ll tell you it’s the result of some small government tax breaks on new car purchases. Helpful, yes. The main spur? No. Car prices in China are still, in dollar terms, generally much higher than in the US. Based on a percentage of average disposable income, car prices in China are probably among the most expensive in the world. Same goes for property prices. Yet, Chinese keep buying.

They will keep buying, at or near this record pace, long after any tax breaks phase out. Chinese want the new cars to drive on the new expressways to carry them to the new shopping malls to buy the new furniture for their new apartments.

Of all the economic statistics I’ve seen lately, the one that best captures what is going on now in China is this: revenues in China’s restaurant industry were up 18% during the first half of 2009, to over $120 billion. That’s not due to stimulus, or bank loans, or tax concessions, or a government mandate to entertain more. It’s largely because Chinese are out having a good time, more often, and spending a lot more doing so than they did a year ago.

It’s one of the best barometers of a nation’s mood, restaurant spending. In China, the mood is buoyant, the outlook bright, and the woks are working overtime.

Comments

[Paul Harper]

I agree with you to a certain degree, but from what I have seen in Shanghia recently, there is a certain demographic that is driving consumer demand. Basically what were called Yuppies & Dinkies in the UK in the 80s & 90s.
Young Upwardly Mobile & Double Income No Kids are very aspirational in China, especially in the large cities, more than 50% of income is spent on aspirational/luxury purchases. There's a lot of them & they will continue to spend.

2009 Nov 18 02:12 AM

[coreopsis]

Well of course that's what you would see if you visited Shanghai. You need to get around more. Observing China from the standpoint of Shanghai is like going to Manhattan and extrapolating to the American heartlands.

As for the author of this article, well yes, your observations are largely consonant with other serious observers but a key causal relationship is missing. Consumers don't spend if the economic environment is precarious -- and it is the central and provincial governments which create the confidence for consumer exuberance.


On Nov 18 02:12 AM Paul Harper wrote:

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2009 Nov 18 10:21 AM

[huangthomas]

Yuppies and dinkies may be kicking up a lot of dusts, but the domestic consumption is hardly moved by the dusts alone. The smoke screen put up by the government is the "retail sell", or more correctly "goods left factories". The figure includes inventories, goverment purchasing as part of the stimulus package, which is 15% of GDP, and real private consumption. It is obvious that the stimulus package is the prime mover of the Chinese economy so far.

2009 Nov 18 10:39 AM

[Alphameister]

Assuming the truth lies somewhere between your very welcome and positive assessment of the Chinese economy and those who insist it's a house of cards, I've no doubt that reality is much closer to your view than to that of the doom-sayers. Thank you for the article and for the restaurant stat.

2009 Nov 18 12:09 PM

[Tony Daltorio]

Excellent article with spot-on comments about what is really going on inside China.

2009 Nov 18 03:37 PM

[Ben Gee]

Government spending in infrastructures usually take 2-3 years to realize. Most of the spending today were in the pipelines sometimes back. However, some of the stymulous money went into subsidizing consumption. This had immediate effect. The booming car sales was one of the results. Without insentives, car sales would not have exploded. The same goes to appliances. Money going into healthcare, UI and pensions will add to future growth. People worry what would happen if or when stymulation is over. Nothing, if the economy can not sustain growth after the first stymulation is over, a new package will be added. Money is not a problem in China.

2009 Nov 19 06:12 AM

[Think-About-It]

Great write up. Thank you.

2009 Nov 19 02:43 PM

[China Interest]

Peter

Rather than being just another person who travels to Shanghai or Beijing and makes an assessment from a couple days there - I would challenge you to go a little further afield. Not all is bright in China. For the average household in China (even in the first tier cities) while they have come a long way and made great progress, they remain struggling to make ends meet. In Shanghai and Beijing (other first tier cities) some is real and much is an illusion. Many retail shops are largely just billboards for window shopping - there is a distinct lack of people actually buying, and nearly half the offices and almost as many residential properties sit empty (the amount of NPL in the real estate sector has to be massive!!).

It takes more than just replicating and putting up buildings to get sustainable growth. The reality is until the government does more than lip service, the consumer will remain crowded out. This economy desperately needs to be readjusted.

China has great opportunities ahead but unless the course of direction is changed the full potential won't be reached. Too many things are being done now that will be looked back on as monumental mistakes (i.e., massive monetary and credit expansion).

Unfortunately too many mainland Chinese believe it is their nationalist duty to say that all is good in China and the rest of the world is in downfall. But putting one's head in the sand and acting as though all is good (and all is bad elsewhere) will only make the situation worse - putting the whole economy at risk. Rather I firmly believe any good citizen that wants to have a sustainable economy and a high standard of living shared by its people must be willing and encouraged to point out problems so as to correct them. Self-criticism is absolutely essential. Any country/company that has stood the test of time - knows this only too well - downfall comes to those who don't.

I would caution people of the work of the 50 cent party on this website. They have migrated from the Economist. en.wikipedia.org/wiki/...

2009 Nov 23 09:13 PM