Beijing on Barack Article

Changing Lifestyles and Consumption Patterns


WORKERS/CONSUMERS. It is widely held that when a country reaches a certain level of development, its economic growth becomes increasingly driven by domestic consumption rather than investment and exports.

AMERICAN CONSUMPTION

Case in point—for the last three decades, American household consumption has been the engine driving both the American and global economy, with consumption accounting for more than two thirds of America’s GDP. Against a backdrop of declining savings rates and easy credit, America’s vast and consuming middle class spent with abandon. However, with the financial crises of 2008, high rates of consumption have lessened, and Americans are saving more.

CHINESE CONSUMPTION

On the other hand, China’s astounding economic growth of the last three decades has been achieved primarily through industrial production, infrastructure-building, foreign investment and especially through exports (making it the perfect ally to Americans’ apparently unquenchable thirst for inexpensive goods). China’s own consumption rate (approx. 25% of GDP) is the lowest of any major economy.

Recession has reduced demand for Chinese exports and the Chinese government realizes the need to move China to consumption-led growth is overdue. Many recession-hit countries including the United States also want Chinese domestic consumption to increase so their own exports will be more attractive which means more jobs at home.

The Chinese have certainly been consuming more in the last 30 years (from 2007-2009, retail sales in China grew by 25% annually) and getting more comfortable with holding some debt (credit card balances rose more than 17% in 2009). However, serious challenges remain for China to reach the point where domestic consumption becomes the main engine of growth. If anything, China’s consumer spending has actually dropped in the last decade as a proportion of the overall economy (see Fig. above).

OBSTACLES

Many economists think that if China is serious about boosting domestic consumption to help economic growth, it needs to:

• Implement institutional reform, such as providing a better social safety net for its citizens. Because of a weak safety net, soaring home prices and inflation-depressed wages, Chinese workers are pressured to save as much money as they can in state-run banks.

• Overhaul the system of “state capitalism”. Up until now, the government has instructed its banks to loan the peoples’ savings to local governments, and state-backed businesses to pay for public work projects, infrastructure and real estate development. As the New York Times noted, China’s impressive economic growth has to a great extent been underwritten by the household savings—not the spending” of its population. This economic system favoring state-run banks, industry and infrastructure over its workers has thus far allowed China to grow quickly and successfully, but will have to be overhauled if Chinese consumption is to be prioritized.

LOOKING AHEAD

How successfully the Chinese government can manage this shift is unknown, especially since many economists fear that all the lending by Chinese banks over the last few years may actually hide a mountain of debt that will threaten economic growth for a long time.

Yet, there is no question that Chinese consumption is going to be a big economic driver affecting much of the world in the near future. Experts predict that China’s share of global consumption is expected to increase from 5.2% ($1.72 trillion) in 2009 to 23.1% ($15.94 trillion) in 2020, surpassing U.S. as the largest consumer market in the world. The American consumer will continue to have clout but Karl Gerth notes in his book, “As China Goes, So Goes the World”, Chinese consumers are poised to transform the world.

The Middle Class


A large and strong middle class that consumes is a key component in economic growth. There is no universal definition of middle class but one common measure is income, with the bottom fifth (20%) of wage earners designated lower class, the top fifth upper class, and the remaining 60% middle class. Still others take into account education, occupation, lifestyles, or consumption patterns.

Chinese Middle Class: By World Bank standards of incomes between $2 – $20/day, approximately 60% of China’s population is middle class. China’s National Bureau of Statistics released a survey result in 2005 which stated that the urban middle class should have a yearly income between 60,000 yuan ($7255 in 2005 dollars) and 500,000 yuan ($60,459). Other experts estimate a “global” middle class definition of households with daily expenditures between $10 and $100 per person. That would put about 100 – 150 million Chinese (8 – 11% of the population) in the middle class. However the middle class is defined, just about all experts expect that China’s middle class will grow exponentially in the next two decades.

A 2010 Credit Suisse survey of Chinese households found that between 2004 and 2009, the average household income of the 40 – 60% income group grew by 98%.

American Middle Class: Measured by income, the American “middle class” is often taken as the 60% of American households that make roughly between $25,000 and $80,000 – $100,000 a year. In 2010, real median household income was $49,445 (a decline from $52,175 in 2008, from a high of $53,252 in 1999).

Consumption of Luxury Goods


China, currently the world’s second largest consumer of luxury goods, is expected to overtake Japan as the top market for luxury goods by the end of 2011. The United States ranks third. Most Chinese consumers of luxury goods are young and middle-aged, whereas American consumers are middle-aged and elderly. The average age of a Chinese Ferrari owner is 32, a U.S. owner is 47.

Growing Income Inequality


A Look at Poverty:

POVERTY THRESHOLD

China
U.N. Poverty Line of $1/day.
The United States
Weighted average Poverty threshold for family of four in 2010 was $22,314.

NUMBERS

China
15%
Today there are about 150 million people living below the U.N. poverty line, and nearly 500 million people living on less than $2/day. A Credit Suisse survey found that between 2004 and 2009, the income of the bottom 20% of households rose 50%.
The United States
15.1%
The poverty rate was 15.1% in 2010 (up from 14.3% in 2009) as an additional 2.6 million people slipped into poverty, bringing the total number to 44.62 million, the highest level since 1993.

WHO IS AFFECTED

China
85% of China’s poor live in rural areas, with about 66% in Western regions. China’s poverty among ethnic minorities is 2 to 3 times higher than among Han Chinese; and higher among children than adults (with 16% of boys and 17% of girls living in poverty).
The United States
Poverty rates for blacks and Hispanics greatly exceed the national average with 27.4% of blacks and 26.6 percent of Hispanics living in poverty compared to 9.9 percent of non-Hispanic whites and 12.1% of Asians. In 2010, 36% of the poor population were children (16.4 million).

Increasing Income Inequality

One of the recent trends that the U.S. and China share in common is growing income inequality in family income. In both countries, the rich have become considerably richer. China: A Credit Suisse survey in 2010 found that since 2004, the income for the top 10% income households had risen by 255% compared with 50% for the bottom 20% income households. America: Between 1979 and 2007, average after-tax incomes for the top 1 percent rose by 281 percent after adjusting for inflation—an increase in income of $973,100 per household—compared to increases of 25 percent ($11,200 per household) for the middle fifth of households and 16 percent ($2,400 per household) for the bottom fifth.

The United States is currently the 41st most unequal country in the world (faring worse than Cameroon and Iran), while China is the 51st most unequal country.

Such growing inequality in both countries has led to an environment of mistrust, resentment, and political polarization. Although many Chinese may endorse and aspire to the activities and lifestyles of the rich and famous, they still tend to resent the way the economic elite got that way. There is strong public opinion that corruption, influence peddling, and manipulation of public offices for private gain are the main reasons for wealth disparities. In the U.S., the Occupy-Wall-Street protests that sprouted in late 2011 tapped into American middle class anger that incomes had shrunk and jobs were lost but profiteers on Wall Street had increased their wealth at the expense of the middle class.

How each country manages its economic inequality speaks not only to the health of its society, but will also be one of the greater challenges in the next decade. It has been argued that in the last decade, there has been a rise of a new global elite that is more industrious and meritocratic than their predecessors, but is also highly global and less tethered to the nation-states that gave them their opportunities. That a group of Chinese and American elites may have more in common with each other than with their fellow citizens presents another challenging aspect to the march of globalization.


© Copyright 2012, U.S./China Media Brief Program, UCLA Asian American Studies Center