The magic eight

Eight is a lucky number in China. The opening ceremony of Beijing Olympics commenced on the eighth day of the eighth month of 2008 at 8.08.08 pm. The car number plates with a few eights go for thousands of dollars in auctions and the consumer will willingly cough up a significant premium to acquire a mobile phone number which is festooned with a couple of eights.

Eight is also the percentage by which, the economists believe, the Chinese economy must grow to provide jobs to the millions of students graduating from Universities, or the rural folks migrating to the cities in search of a better life. The first two quarters of this year have been difficult – China could only muster up a 6.1% GDP growth in Q1 of 2009 and just missed the magic mark of eight in Q2 with a 7.95 growth. However the Q3 figures came at 8.9% and the whole of China heaved a collective sigh of relief that the growth of 8% will be achievable this year.

Clearly the magic has been achieved with a lot of stimulus  - Chinese government is trying to spend four trillion yuan in stimulating the economy. Money is being poured into building roads, bridges and some income generating activities. In the first nine months of the GDP growth of 7.7 percent, 7.3 percent came from investment and 4 percentage points from consumption (decease in exports brought down the total figure to 7.7%). Exports continue to decline, though as the mood in the US brightens a little, the rate of decline has come down. Economists predict that the exports may actually start growing next year – but are unlikely to touch the 2007 levels in the near future as the American consumer may never reach back the frenzied shopping that they exhibited to the delight and the economic growth of the whole world.

Consumer

Economist say (softly in China and more shrilly in the West) that the Chinese consumer must spend more to compensate for the loss of exports and redress the global imbalance where the American consumers were sustaining the global economy with their profligate consumption of Chinese goods and the Chinese Consumers saving as much as one-fourth of their incomes. Hence the critical question now is whether the Chinese consumer will spend more and save the global economy.

The traditional reason that is given for the Chinese consumer to save a large proportion of their income is that a large number of them do not enjoy social security and need to set aside for their retirement and possible medical expenses. Secondly, culturally Chinese are considered to be thrifty and saving rather than consumption is considered a virtue. While these factors – whether cultural or structural – do contribute to the Chinese households stashing away a large proportion of their income there are other social and emotional reasons for this behaviour.

The other barriers to consumption

Owning an house ranks among the most important desires and goals for a Chinese. The idea of living in rented accommodation is alien and unacceptable. Traditionally Chinese have liked the idea of stability and state provided that by allotting life long accommodation, which you keep even after retirement. With state housing gone for most, the Chinese are rushing to buy apartments. The strong demand coupled with a relatively controlled supply has made the cost of housing disproportionate to the consumers’ income. Today the average per capita annual urban disposable income in Shanghai will buy two square meters of an apartment. Additionally Chinese need to cough up 30% of the price as down payment.

On the other hand social norms today make the idea of continuing to live with the parents after marriage as nearly inconceivable (no pun intended) and no self-respecting woman will accept a man’s hand in marriage unless the hand holds the keys to an apartment. With low starting salaries even for University graduates, parents need to bear the burden of saving for the down payment. The high mortgage payments in relation to the income further reduces the spending ability of the consumers.

Secondly, while impending marriage of the child brings a substantial financial burden for the family, the university education before that is also a formidable expense. As China moves towards becoming a market economy, the cost of education has been increasing steadily. Today for an average family the cost of providing a university education may take up as much as one-third to half the disposable income of the family. Even school education costs are going up as more Chinese consider the idea of sending their child to an expensive private school.

Thirdly the average Chinese consumer is value driven. Products receive a microscopic scrutiny and intensive comparison and valuation. Prices are compared thoroughly and promotions and deals welcomed enthusiastically. While there is a trend of premiumisation, it is not universal and applies more to products of visible consumption which can make the consumer look good and successful. Additionally the disappointment that many consumers faced, when the salary increases and bonuses were less than generous in the beginning of the year or the business growth challenged, has thrown a spanner on the path of moving to premium products.

Hence while the Chinese consumer will gradually spend more, and consumption as a proportion of the Chinese GDP will move up from its uniquely low level today, the movement is going to be gradual unless significant changes are made to make housing and education more accessible and affordable and the consumer regains the confidence of continued prosperity.

Written by Ashok Sethi, TNS China

ashok.set@gmail.com

ashok.sethi@tns-global.com