China’s Consumption Dynamic to Surpass Any Consumer Market in the World

In this three minute vedio, Stephen Roach, a professor at Yale University and former nonexecutive chairman of Morgan Stanley Asia, summarized one of the key points of my book The Chinese Dream:

China is well on its way to "create a consumption dynamic that will outstrip the growth of any consumer market in the world,” how the U. S. should embrace the opportunity, and why improving the China–US bilateral relationship is so critical for the economic future of both countries.

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Will the Chinese Government Deliver on the New Five-Year Plan?

Forbes: Helen H. Wang
China Premier Wen Jiabao deliver the Report on...

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With an iron fist to rule out any source of instability, the Chinese government is determined to set the country on the right path. The new five-year plan, unveiled at the National People’s Congress session in Beijing this past week, set ambitious goals for what China would like to achieve in 2015: move to more evenly distributed incomes, a greener environment, and higher up the value chain for its industry.

At the heart of the five-year plan is a focus on boosting domestic consumption and restructuring its economy toward more sustained growth. The plan addresses two critical issues that are of paramount importance to China’s fledging middle class: inflation and affordable housing.

Since last year, the Chinese economy has shown signs of overheating due to the extensive government investment in infrastructure. Food prices rose sharply at 11 percent in February, creating much public anxiety. Skyrocketing real estate prices are like a dagger in the heart of the new middle class who see their dreams of owning homes as unattainable.

The new five-year plan aims to lower GDP growth to 7 percent in an effort to tame inflation. The government also plans to build 36 million affordable homes in the next five years. Premier Wen Jiabao repeatedly stated that improving people’s livelihood is the top priority of the government.  All these measures are intended to address the root problems of public discontent and help maintain social stability.

Reigning in inflation and providing affordable housing are important steps to foster a growing middle class. A major hindrance to increased Chinese consumption, however, is the country’s high saving rate, which reflects the underlying insecurity the Chinese feel about their future.

In writing my book The Chinese Dream: The Rise of the World’s Largest Middle Class and What It Means to You, I interviewed over 100 people in China. They are from all walks of life and are the new members of the Chinese middle class. The biggest concern they have is social security.  Most people I talked to save 25-50 percent of their incomes for a rainy day, as I wrote here.

Victor Ku, a hotel manager in Guangzhou, told me that he had to save two-thirds of his income. “I have to pay for my own health expenses,” he said. “In China, we don’t have security. If you get sick, you can immediately become poor.”

In 2009, the Chinese government announced a plan to spend $124 billion to overhaul the country’s broken healthcare system. Since then, the government has increased insurance coverage in rural areas and allocated funding to build more community clinics.

However, the underlying problems remain as hospitals continue to rely on revenues from drug sales and expensive treatments. World Bank research shows that more than 40 percent of healthcare spending in China goes to purchasing medicine, a disproportionately high amount compared to other countries.

Which leads to another problem that the government has not been able to successfully address: corruption. Corruption is so endemic in Chinese society that it has become a national ill. It ultimately reflects a system that lacks the function of cross-checks, and is a major source of social instability that the government is so firmly intent to prevent.

Stephen Roach, former chairman of Morgan Stanley Asia, believes that the new five-year plan will “spark the greatest consumption story in modern history.”

The next five years will be crucial for China to develop a larger and more stable middle class. Will the government achieve all the goals set out in the plan? Most likely. Judging from its past performance, I would not underestimate the Chinese government’s ability to deliver. Will China become a more open society? Sooner or later, when the Chinese government sees it is in its own interest to let go of control.

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What Happens When Money Flows Uphill

Forbes: Helen H. Wang

Many people in the U. S. believe that the Chinese currency yuan is undervalued by 25-40 percent, which causes large trade deficits between the U. S. and China and costs hundreds of thousands of American jobs. Last month, the House of Representatives passed a bill that would allow the Commerce Department to impose tariffs on Chinese goods.

While there are many debates about the pros and cons of forcing the yuan to appreciate, few have paid attention to the root cause of America’s trade deficits. Stephen Roach pointed out that the United States has trade deficits with 90 countries around the world. The reason is that Americans don’t save. In 2009, America’s net saving rate was negative 2.3 percent. The United States has been borrowing from China and other countries to make up the gap.

To examine how America got itself into indebtedness, Nobel prize-winning economist Joseph Stiglitz argues that the current global financial system causes money to flow uphill from poor countries to rich countries, and it’s self-defeating. Continue reading

Opportunities in China’s Healthcare Industry

In my last post, I wrote about the trend in Chinese consumption being significantly upwards. Some people commented on my Facebook and LinkedIn groups that they believed China’s consumer market would be much larger if it were adjusted for the exchange rate.

Doris Gallan, an American who has lived in China for years, wrote: “The way people shop in Wenzhou, China — they are aiming to be the #1 consumer nation! There are many high-end consumer stores here and people (especially youths dress very fashionably and drive expensive cars).”

While the Chinese middle class (see my definition of the Chinese middle class) will alter the global economy in the years ahead, there are obstacles to Chinese consumers increasing their spending. Most people I talked to save 25 to 50 percent of their monthly income for a rainy day. Continue reading