Chinese consumption raises a red flag
What if growth in wages slows down, and the Chinese millennials, with an their assortment of credit cards, aren’t able to pay their mounting debts? A threatening consumer credit crunch in China could have global fallout …
Andy, a tour guide who led a group of us on a business tour of Shenzhen last month, seemed almost proud of the fact that he was juggling eight personal credit cards. "The government encourages us to spend," he said. He seemed unfazed by this state of affairs, apparently unaware of any potential downside.
Nor is he alone. Tom Wang, a 26-year-old university graduate told a similar story to the Financial Times (FT) a few months ago. Wang said he’d used ¥60,000 on four credit cards to make up the gap between his starting salary of ¥3,000 and a lifestyle that extended to buying the newest smartphones. Before long, his debt was ¥130,000 and his monthly repayments were ¥1,500.
It is this trend that former Goldman Sachs economist Jim O’Neill has flagged as one of the most critical shifts in global economic tectonics.
"The world is more dependent on the Chinese consumer than anything … Chinese [government] policy is to promote the consumer," O’Neill said at last week’s Discovery Leadership Summit in Sandton.
This is evident on the ground. Walk the streets of China’s largest cities, such as Beijing and Shanghai, and you’ll be struck by the series of immense malls — each of which would dwarf Sandton City — which seem to cascade into each other.
Caffeine merchant Starbucks famously opens a store in China every 15 hours. And last week the company released its results for the year to September, which showed its sales in China and Asia Pacific rose 38% to $4.47bn from a year before — still second to the US, but growing far faster.
At the same time, Apple reported a 16% surge in Chinese sales, to $51.9bn — making it Tim Cook’s second-largest market too.
Investment bank China International Capital Corp points out that household consumer loans in China, including mortgages, grew 66% between 2015 and 2017, to ¥31.5-trillion — equal to 38% of GDP. At this point, it’s still lower than the US (77% of GDP), but it’s growing fast.
This, of course, has many implications for SA businesses. For a start, as O’Neill pointed out, it means the old cliché of yanking as many minerals out of the ground as possible and flogging them to China won’t really work any more.
Azar Jammine, the chief economist for Econometrix, says the conventional way of thinking about this is that the shift to a consumer-led economy would be a bad thing for a country like SA, as it would threaten our commodity exports.
"But I don’t altogether buy that view. A surge in China’s consumption-led growth would also reverberate through the world, and still indirectly sustain a demand for base minerals and precious minerals in any event," he says.
And besides, says Jammine, China is also likely to buy SA products and services in a way it hasn’t until now. "Think of tourism — the mind boggles about what could happen. And there are other areas where SA could take advantage of a wealthier Chinese citizen: our private education systems, our food-processing and agricultural skills, as well as products like fruit and wine," he says.
Jammine knows this first-hand. He is also a director of hospital group Netcare. A few years ago a Chinese delegation was wowed by the skills and technology in SA’s private health-care sector.
"There are many areas we have a comparative advantage, so while it’s been seen as a bad thing for commodities, China’s shift to a consumer-led economy could be very positive for us," he says.
It’s not as though SA is unaware of this trend.
This week, trade & industry minister Rob Davies arrived in Shanghai for the first China international import expo, as head of a delegation of 27 local organisations and companies. They include agro-processing, footwear, engineering, petrochemicals, defence and IT.
Cobus van Staden, a researcher at the SA Institute of International Affairs, says the world is slowly starting to get to grips with what a Chinese consumer society means for everyone else.
If the Chinese consumer collapses, it would be a terrifying black swan event that would be devastating for the whole worldAzar Jammine
"A small shift in China, given the size of the population, can still have a large impact on the trade patterns of individual countries," he says.
This is evident in the grisly example of the demand for donkey skins, used to make a gelatin called ejiao for use in Chinese traditional medicine. According to an Associated Press news report this year, the black market for donkey skins has caused "agents" for Chinese buyers to seek out "donkey skins from Africa, Australia and South America, threatening the world’s donkey population and driving violent crime and protests across Africa".
Of the global population of 44-million donkeys, 2-million are killed every year for their skins, according to UK NGO The Donkey Sanctuary. It’s a story you’ve seen with the rhino massacre in SA, driven to an extent by the dangerous myth that the animal products can be used to treat fevers and other ailments.
But Van Staden says that as more imports are needed to feed the Chinese consumer, it could be a boon for countries that supply them.
"We’ve seen a number of Chinese goods manufacturers open in SA to build autobodies, appliances and other things. While a lot of what they make is meant for the African market, a proportion of it may be sent back to China. That percentage is small right now, but it has the potential to grow," he says.
Take Hisense, which began as a small radio factory in China in 1969. It is now producing flat-screen TVs and appliances in the Western Cape too. Last year it celebrated its millionth TV made in SA.
Jerry Liu, the general manager for Hisense in SA, says 80% of the products made locally are sold in SA, with 20% going into the rest of the continent.
What it means
The world is becoming more dependent on the Chinese consumer — but that could be risky
But, he says, China’s policy shift to import products and services more aggressively presents an opportunity. "To supply the Chinese market from SA will develop over time, but on the more immediate horizon, the focus will remain to develop the rather untapped African market," he says.
As Liu suggests, there’s no arguing about the momentum.
Earlier this year, the FT’s Martin Wolf pointed out that in 2000, personal consumption in the US was 13 times that of China; today it is under 1.5 times. "The plausible assumption … is that over the next decade, a mass consumer society will emerge in China," the FT wrote.
Whereas China was once the workshop of the world, it now stands on the cusp of being the biggest buyer of global products. "Chinese consumption has become so large that the country is the most important market for luxury and car companies — and is driving sales for global health care, entertainment and apparel brands," the news-paper reported.
But what if the party ends? What if growth in wages (currently about 7%) slows down, and the Chinese millennials, with their assortment of credit cards, aren’t able to pay their mounting debts?
Jammine is unequivocal: "If the Chinese consumer collapses, it would be a terrifying black swan event that would be devastating for the whole world."
But, oddly reassuringly, he says this has been a constant fear for the past two decades and, for some strange reason, it has never materialised.
"It may be cultural. You have a society that is not democratically inclined, and this authoritarianism may be effective economically to help buck a trend that could produce a more cyclical outcome in a more democratic country," he says.
But SA has just as much to lose if that belief doesn’t hold true.