CAN CHINA REALLY BECOME A CONSUMER SOCIETY?

Guest contribution from Gaius over at Decline and Fall of Western Civilization:

That chinese households are deep repositories of savings has been taken at face value in the macroeconomic community for a long time. Many around the world are counting on the chinese government to spur economic growth by utilizing those savings to boost domestic demand, correcting longstanding imbalances in trade that have been the fuel for the great leveraging of the last thirty years.

While china has certainly accumulated massive forex reserves as a result of maintaining its currency peg with the dollar, via paul kedrosky, this BBC radio documentary makes an extremely interesting case that these savings are not what they appear at all — indeed, that there is essentially no prospect of pushing extant savings into consumer use even if economic conditions improve.

for … poorer families living in the countryside, the idea that they’ve got money sitting around in bank accounts that they simply choose not to spend is a misunderstanding of what life is really like. for the Yu family, there are rarely choices about what to spend their money on. … as Colin’s parents explain, they spend almost all of their income on necessities.

Expected healthcare expenses play a huge role in forcing savings, even among children expecting to care for their adults in old age, as rural chinese families are essentially self-insuring. Young city dwellers have higher incomes and are often insured, but are also committed to saving in advance of caring for parents who in communist china made nothing like the amounts available to them today.

It very much seems to me that, in order for chinese households to transition to a more consumer-oriented society, they will likely need the aid of two things: a stronger currency, and a reliable social safety net.  The first would increase purchasing power and domestic demand while decreasing reliance on exports; the second would remove the impetus to self-insure.  These are both changes that will take a long while, once enjoined, to shift social expectations in china; as neither has been countenanced thusfar, i can see little prospect of either in the short run.