Can China’s Consumers Save West?

China’s huge domestic market has long fueled dreams that once its consumers are unleashed, rising demand will help heal ailing Western economies. Don’t count on it.
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Although a long succession of Western leaders, bankers and finance officials have held out the holy grail of the Chinese consumer’s purchase of Western exports as the savior of flagging economies, it may well remain a distant dream.
It’s certainly true that China, with an embarrassing $3 trillion in foreign exchange reserves and trade and current account surpluses that amount to 10 percent of gross domestic product, has been seeking to drive up imports.
Yu Ping, vice chairman of the China Council for the Promotion of International Trade, told reporters at the Asia Pacific Economic Co-operation forum in Hawaii in November that the current five-year plan is focused on balancing imports and exports. The plan, he said, “demonstrates China’s resolution to improve its status in technological development as well as its determination to leverage the country’s massive domestic market.” As an example of that resolve, Vice Minister of Commerce Zhong Shan said in Shanghai in September that the commerce ministry was considering cutting taxes on imported consumer goods and was soliciting guidelines to encourage more imports. Andy Rothman, the China macro strategist for CLSA in Hong Kong, in a recent report pointed out that China’s share of personal consumption expenditure for U.S. goods has doubled over the past decade, with U.S. exports of electronics, agricultural and other products to China rising by 468 percent from 2000 to 2010.
Still, there are formidable structural obstacles to raising consumer spending in China that could take decades to unravel. Chinese household savings are as high as 50 percent, partly due to the region’s traditional conservatism, but also because the country lacks a social safety net. Pensions are almost nonexistent, along with reliable health insurance – either government or private. The education system is equally troubled, to the point where families who want to give their children adequate schooling must send them to private institutions. While the university system is improving, many wealthy Chinese send their children overseas.

Consumers are also cautious. According to government statistics, private household consumption was only 37 percent of gross domestic product in 2009, down from 49 percent in 1990, a fact that’s likely best explained by the massive rise in GDP over the period. In the United States, by contrast, household consumption accounts for 70 percent of GDP, including spending on health care by both individuals and government.

Statistics on consumer imports themselves are also problematic. Much depends on the definition of what is an export and what is an import. It’s no longer a world where a manufacturer produces a mousetrap in Pekin, Illinois, and sells it in Beijing. Galina Hale and Bart Hobijn, two economists for the Federal Reserve Board of San Francisco, in a widely circulated August 8 issue of the board’s Economic Newsletter, use the example of an Apple iPhone; in 2009 it sold for about $500 in the United States and was produced for about $179 in China, the economists found. That ought to mean that $179 of the retail cost consists of China-based content. The other $321 represents U.S. costs, markup, retail rental costs, design and research etc. But Hale and Hobijn found that only $6.50 of that iPhone assembly price was actually due to assembly costs in China. The other $172.50 reflected the cost of parts produced in other countries besides China – including $10.75 for parts produced in the United States and exported to China.
Across the board, Hale and Hobijn found, “on average, of every dollar spent on an item labeled ‘Made in China,’ 55 cents go for services produced in the United States. In other words, the U.S. content of ‘Made in China’ is about 55 percent. The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services.”
It’s the same going the other way. Goods stamped “Made in USA” don’t necessarily come from the United States. For instance, one of the country’s biggest export categories to China in 2010 was aircraft, at $5.6 billion. But only 70 percent of the parts for the 787 Dreamliner, Boeing’s newest-generation aircraft, were produced in the United States. The other 30 percent came from the 70 operations the plane-maker has outside the country. Thus, while the United States swells with pride over its homegrown Boeing, at least 30 percent of the manufacturing jobs are elsewhere.

Robert Chang