China's consumer era takes hold
By John Berthelsen

From the increasingly stylish boutiques and bars of Shanghai to the factories of Guangzhou and Shenzhen, China's Maoist era is well and truly gone, replaced by progressively more rampant consumerism that is taking the world's most populous country into the era of the credit card.

Much of this stems from structural changes introduced in the 1990s by China's iron ex-premier, Zhu Rongji, who in 1998 forced through housing reforms that have gone largely unnoticed by analysts. These reforms have turned over vast amounts of state-owned housing to the people who lived in them at discounts of up to 80 percent. Other laws enshrined private property ownership in the Chinese constitution and allowed land-use rights up to 70 years. Private home ownership, the devil's own work to a proper communist, is taking over.

Besides transforming tens of millions of people from asset-poor renters into homeowners, this has had a more profound effect. It has begun the process of turning China into a credit-driven society, as most of the developed world is today. The ability to buy on credit is transforming China itself, says Hugh Peyman, head of the Asia-based Research-Works (www.research-works.com ) strategic analysis firm.

China is actually following much of Asia into a consumer revolution that has been going on over the past 10 years. Favorable demographics and increasing wealth are promising to revolutionize global economics and propel world trade and industry for a generation. Across the Far East, governments are turning to the consumer for growth after decades of export-led economics that held consumerism in check. Birthrates are falling, incomes are relatively stable, household sizes are shrinking, savings rates are high and trade patterns are being altered by World Trade Organization (WTO) rules, opening the doors for Western exporters.

In a provocative 39-page study released in May and titled "China Enters a New Era", Peyman argues that China's consumers are obliterating the old China. In Shanghai today, more than 80 percent of families now own their own homes. Virtually all residential property is now out of state hands. It is believed that 38 percent of urban households can now afford to buy property. Affordability is defined as able to swing a 30 percent down payment and a 20-year mortgage.

As an asset-owning class, China's new homeowners set out to rehabilitate and refurbish their property. That released a huge amount of pent-up demand for durable goods - refrigerators, stoves, air-conditioners - and white goods as well - and cars. In turn, that unleashed credit demand. Housing is estimated to have added 1.6 percent to China's gross domestic product in 2001, some 22 percent of total GDP growth for that year.

Over the 1990s, faced with a stagnating state sector, Zhu, known as Boss Zhu for his hard-edged ability to muscle reform throughout his entire career, and other economic planners broke the so-called Iron Rice Bowl, the state-paid jobs that Mao Zedong theoretically guaranteed to every Chinese peasant. They began to dismantle China's rusting state-owned enterprises (SOEs). That turned more than 100 million workers into the street.

Some faced dreadful dislocations. Others, however, took their minuscule pensions and looked for something to do. They got jobs in the private sector. Many became successful entrepreneurs. There are still millions of unemployed on China's streets and the country's political leadership is often sclerotic at best. But vast numbers of entrepreneurs have sprung up, transforming the private sector.

"Many forces are coming together to reinforce each other, building on economic liberalization, planning and policy development of the 1990s," Peyman writes. "These are creating major trends that have major implications. The scale and duration of these changes are so large that they will take a decade to play out fully."

The overall trend, Peyman says, is toward a more normal, market-driven economy that is feeding on 50 years of pent-up demand. The consumer is being leveraged through mortgages, auto loans, credit cards and consumer finance. Credit cards are in their absolute infancy. Only about a million credit cards have been issued - one for every 1,300 people. Only 20 percent of China's private cars are financed today, compared with 70-80 percent in mature societies.

Mortgages have only been made over the past three years, auto loans since 2001, and credit cards were introduced in 2002. Consumer lending, still in its infancy and comprising only 8-9 percent of all loans, has suddenly become a major focus of all of China's big four banks.

There are plenty of indications that China's consumers are learning fast, as a stroll down a street in almost any city demonstrates. Women, especially in Shanghai, are as stylishly dressed as they are in Hong Kong. Car ownership is soaring.

It was the car, of course, that made the United States the most mobile society in the world and changed its social mores. A car could take an internal emigrant across the country to a new job. It required a vast new road network. China in turn has responded with a national road grid that has been under way for a decade.

Suddenly, after lackluster increases for half a decade, auto ownership, fueled by credit, exploded upward in 2002. Production doubled in just the first four months of 2003 after soaring upward 60 percent in 2002. China had only two cars per 1,000 people in 1997, says Peyman. Car ownership has now doubled to four per 1,000 persons. If pent-up demand is any indication, there will soon be a lot more. Even Indonesia has 15 cars per 1,000 of population, Thailand 41, the United States 481.

Although China still produces half the world's bicycles, the famed Flying Pigeon bicycle is being supplanted. Shenzhen China Bicycle Co, one of the country's biggest brands, is in serious financial trouble as the Chinese opt for more luxurious forms of transportation. US-based General Motors expects China to be the world's third-biggest car market by 2010.

As incomes rise, economies of scale and competition are bringing down unit costs and prices. The coming multinational competition as China is increasingly enmeshed in the WTO is spurring local manufacturers to greater efficiency and has broken monopolies, Peyman writes. These local manufacturers have injected competition, creating choice especially at the lower end of the market, where demand is most price-sensitive.

Housing is driving much of this, Peyman says, with China seeking to increase average personal living space from 20.4 square meters to 25 by 2010 and 30 square meters by 2020, by which time the urban population is predicted to be 400 million, implying 200 million square meters of new housing over the next 16 years. At an average of 5,000 yuan per square meter, that entails US$120 billion in new property construction over each decade, a sizable funding job for a financial industry that is still in its infancy.

Increasing consumerism has created a new retail class of real-estate agencies and loan brokers and spurred a secondary market in financial instruments like mortgages. Property and land auctions have appeared. The financial system is thus being forced to cater to new consumer demands. Some $120 billion is needed by the property sector along by 2020, assuming average mortgages will be signed at 50 percent of property value. Mortgage-backed securities and mortgages for existing housing are also necessary.

It should be noted that China's banks are awash in debt and nonperforming loans, many of them from state-owned enterprises with no hope that they will ever be repaid, and more from equally feckless bust private companies.  Whether the banks can manage the transition to a clientele unused to consumer debt and likely to get in over their heads without proper banking supervision remains to be seen.

With its consumerist society just getting under way, China is now committed to opening its economy as stipulated under the agreement to join the WTO, and Western manufacturers and exporters once again are murmuring to themselves the mantra: There are 1.3 billion people there and if they each only buy a single pair of shoes ...

China has been disappointing the world's shoemakers for decades, perhaps centuries. It is a question whether they will continue to do so. But whether the world's merchants get a chance at Mr Wang, the Chinese version of Mr Smith, the national economy is producing on its own. This is a different China.

(Copyright 2003 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)