How Can Chinese Households Spend If Their Incomes Are Declining?

November 12, 2015 11:38 am Last Updated: December 11, 2015 3:43 pm

The Chinese consumer who saves is the most important person in the world right now. He is supposed to take over from the American consumer, who is ridden by debt and unable to spend.

Unlike their American counterparts, they hardly have any debt and plenty of savings. Cheerleaders like McKinsey and Jack Ma would like nothing better than for Chinese consumers to spend their trillions.

The problem: It just won’t happen anytime soon.

“Given China’s economic structure, underdeveloped financial market, and weak welfare state, high levels of precautionary saving will persist for the foreseeable future,” wrote Keyu Jin, an economics professor at the London School of Economics in a post for the World Economic Forum.

China bulls are now touting the two-child policy, which won’t fully kick in until 30 years from now. But it’s the one-child policy that is preventing middle-aged workers from spending.

“The Confucian tradition of filial piety meant that children supported their parents in their dotage. But, after more than three decades of the one-child policy, retirees cannot reasonably expect nearly as much support, and China lacks a strong pension system to pick up the slack,” wrote Jin.

A strong health care system is missing as well, another reason why Chinese have put $9 trillion in the bank, according to JP Morgan figures.

You need income to spend, Jin points out, rather than dip into your crisis savings. But …

“Household income’s share of GDP has been falling—from about 70 percent in 1990 to about 60 percent in 2010. It remains at a constant level of 80 percent in the developed economies,” wrote Jin. Of course incomes have risen absolutely speaking, but not relatively to the rest of the economy.

And with most of the capital markets impaired (bank savings, real estate, stocks) it’s interesting that labor’s share of GDP declined to 42 percent since the early 2000s until the series was discontinued in 2011. (It’s 62 percent in the United States).

(St. Louis Fed)
(St. Louis Fed)

There is hope, however, Jin said. As soon as the current cohort of middle-aged Chinese, still traumatized by the Cultural Revolution, retires and their children take the main role, the picture could change.

“China will need to be patient, recognizing that the current generation is simply too fixated on saving to provide the kind of surge in consumption that is needed,” Jin wrote. “China’s younger generation are keenly aware of their quality of life, owing partly to their constant exposure to advanced-country lifestyles. As a result, they are far more inclined than their parents to spend on services and nondurable goods.”

If their hopes aren’t dashed by a financial crisis made in China.