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Two More Myths About Business in China 0 comments
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' Pizza Hut (a higher-end chain in China than in the U.S.) and gets pedicures weekly. She buys cosmetics from Estée Lauder and clothes from Zara and Uniqlo. She has a cracked Apple 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. www.cmrconsulting.com.cn
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