Can China Save the Global Economy?

Jim Jubak MSN Money February 2, 2010

Optimists are counting on the growing Chinese consumer class to spend the world back to prosperity. But a new study suggests that won't be so easy.

If, as I argued in my previous column, the free-spending, never-met-a-credit-card-they-didn't-like U.S. consumers aren't coming back within the next decade, who will pick up the slack? Who will buy all the cars, the flat-screen TVs and the steel that the global economy is geared up to produce?

The hopeful answer is China and its growing numbers of middle-class consumers. Not only does that country's growing wealth add hundreds of millions of buyers to the markets for products as varied as designer sunglasses and air conditioners, but the Chinese government is also committed to policies that will grow domestic consumption.

All the world has to do is wait, and the Chinese consumer will pick up the shopping bags dropped by exhausted U.S. consumers and spend the global economy back to prosperity.

At least that's how the hopeful story goes.

But a new study from consulting company McKinsey makes me doubt exactly how much global lifting China's consumers will be able to do over the next couple of decades. The big obstacle is the heavy structural emphasis in the Chinese economy on exports and government-led investment. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=fd30c1b2-4537-4c98-94c8-0dd9757cc93e,68242c12-cef0-4257-a66f-4aa3c0636fd9,97609eb8-0882-40d1-83b8-f6b2e5bbc247,1c335f0e-61f8-4c74-a468-b923b9715350,cb31c476-d22e-4013-8e15-c4861f6b0e6f,15a563cf-b5b6-40be-b8a5-3871a1197592", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=fd30c1b2-4537-4c98-94c8-0dd9757cc93e,68242c12-cef0-4257-a66f-4aa3c0636fd9,97609eb8-0882-40d1-83b8-f6b2e5bbc247,1c335f0e-61f8-4c74-a468-b923b9715350,cb31c476-d22e-4013-8e15-c4861f6b0e6f,15a563cf-b5b6-40be-b8a5-3871a1197592;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');In 2007, China was the fifth-largest consumer market in the world, behind the United States, Japan, the United Kingdom and Germany. But consumer spending accounts for a much lower percentage of the economy in China -- just 36% in 2008 -- than in the United States (71% of gross domestic product in 2008), the United Kingdom (67%) or Japan (55%).

China's consumer-consumption-to-GDP ratio is low even for the developing world. Brazil's ratio came in at 65% in 2008, India's at 57% and Thailand's at 54%. As McKinsey points out, China has the lowest consumption-to-GDP ratio of any major world economy except Saudi Arabia, where oil exports account for a huge share of the economy.

In fact, China's consumer has been losing ground since 1990, when consumer consumption accounted for 51% of GDP. China's hope: Save less So what would it take to get that ratio up in China?

The study (you can find a summary of it here) looks at three scenarios for future consumer demand in China:

First, there's what McKinsey calls the base case. In this scenario, the Beijing government wouldn't do anything to increase consumer spending in China. Any gains in consumer consumption would come from the increasing wealth of Chinese consumers as the economy grew. Under this scenario, consumption would rise to about 39% of GDP over the next 15 years.

Second, there's the policy scenario. In this case, the Chinese government would fully implement the changes that I have already mentioned for promoting consumer consumption. Under this scenario, consumption would rise to 45% of GDP. That'd be a big increase but still leave consumer consumption with a smaller share of the economy than in South Korea (where consumer consumption accounts for 48% of economic activity).

Third, there's what McKinsey calls the stretch scenario. In this case, the Chinese government would implement policies to reorder the country's economy. This effort could push consumption up to 50% of GDP, still short of the consumption-to-GDP ratio of countries such as the U.S., the United Kingdom, Canada (at 60%) or France (58%) but creeping toward Japan's 55% ratio. This third scenario would add $1.9 trillion a year in consumption to the global economy.

China's government seems committed to the pro-consumer changes that make up McKinsey's second scenario. Those changes concentrate on repairing the social safety net in China so that Chinese families feel more secure and don't believe they have to put away quite so much in savings. The average Chinese family now saves about 25% of its discretionary income. That's three times the savings rate for Japan, a country of notorious savers, and 15 percentage points above the GDP-weighted average for Asia as a whole.

Consumerism in China

The changes that have been proposed so far include health insurance and better pensions, plus lower school fees and more aid so that Chinese families don't have to save as much to send their children to college. (McKinsey found in surveys that saving for the cost of a university education was the No. 1 reason for families to save.) Implement those, the theory goes, and Chinese families would feel less compelled to save.

But, according to McKinsey's models, these plans would do little to increase consumption as a percentage of GDP. More financing for education, for example, would add just 0.4 to 0.7 percentage point to the current 36% consumption-to-GDP ratio. Better health care would add just 0.4 to 0.6 percentage point.

Continued: Major changes neededMore from MSN Money and MoneyShow.com

What if consumer demand is dead?

Jubak on video: Not the end of the world for China

The coming economic crisis in China

How to bet against China using short ETFs

Smooth sailing now; icebergs ahead

Jubak on video: China taking the Spanish empire's path

1 | 2 | next >

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Connect with JimBecome a fan on FacebookSubscribe to his e-mail newsletterDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Articles by Jim JubakWhat if consumer demand is dead? 01/28/20103 stocks whose time has come 01/25/2010Smooth sailing now; icebergs ahead 01/21/2010More...Jim's Most Recent Top Stocks PostsBuying into Brazil againWhen bad prices happen to good stocksHeaded for a 10% correction?Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='wtqxcghrk2gba74puy9v30c30btiwg6e';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 10 of 36PreviousNextBrutus625 #1Monday, February 01, 2010 7:25:10 PMThe answer is no, China cannot save the global economy. Even if the average Chinese citizen has lots of money burning a hole in their pocket, they are going to buy products THAT ARE MADE IN CHINA!!!! Even if they buy a few products from Japan, Korea or India, it's not going to help the US economy. We don't make anything anymore that the average Chinese citizen would want to buy. They might possibly want to travel to Disneyworld but that's probably about as much as the US would benefit.ReplyReport Abusenukaahaha #2Monday, February 01, 2010 7:51:52 PMThe problem is that US need save herself, no nation should count on others to save its economy. US is becoming an awful welfare country that take(rob) money/resources from all the counties around the world now. The two major exports from US are the worthless dollar and wars.ReplyReport Abusedavid393071 #3Monday, February 01, 2010 8:09:09 PM

China cannot save the "Global Economy".

What is mentioned in the article are just the Effects (symptoms) and not the Causes of the "Global Economic Crisis".

The Causes (you get rid of these and you do not have the same Effects and Results):

1. The Laws (1999 Gramm Leach Bliley Act and 2000 Modernization Act) that removed of the Glass Steagall Acts, that prevent another 1907 Depression and 1929-1939 Great Depression. With the Chinese retaining their versions of the Glass Steagall Acts as the reason they are not hurting as much.

2. The removal of the Glass Steagall Acts legalized those activities of that caused the "Global Economic Crisis". Specifically the International Swaps and Derivatives Association, that made profits that triggered the "Global Economic Crisis", "Mortgage Crisis", "Wall Street Crisis", "Financial Crisis", etc. by making profits of 60-100 Trillion USDs, and will be triggering another "Crisis" of 54.6 Trillion USDs. As to why these Billion USD Bailouts mean and do nothing other than buying Electoral College votes.

3. 1994 Free Trade Agreements, that legalized all the "Outsourcing" that was previously heavily tarrifed or penalized with trade restrictions. These Free Trade Agreements were pushed by US Corporation Lobbyists at Congress to escape the expensive US Labor Unions.

4. Illegal Aliens, more than 23 Million (2006 US Intelligence), that are responsible for Bankrupt Illegal Alien Harbor State California spending over 10 Billion USDs each year of 85 Billion USD yearly budget on Illegal Aliens and not on Legal Residents, Firefighting, Law Enforcement, Infrastructure, Education, Medical Facilities, etc.. As only 1 works and 8 live off of Public Assistance, and they do not pay State nor Federal Income Taxes, paid under the table in cash, as not to be turned in by IRS to ICE or INS for deportation. Additionally, known forced cooperation with Terrorists by Mexican Drug Lords or anonymously turned in to ICE or INS, with legalization of Illegal Aliens not effective as the relatives still in Mexico used as leverage by Mexican Drug Lords. And US Congress knowing this prior to attempting to pass the 2006 Illegal Alien Act (based on California Propostition 187, "Save Our State"), and chickened out after the Illegal (no permits) Nationwide Demonstration of Illegal Aliens 2006 (when they were counted).

_______________

And the only things keeping the US from going into a "Supernova" Depression are the Wars. Just like how pre WWII (1939-1941) shipping of War Materials to England started the US Economy moving from a Agricultural Based Economy to an Industrialized Economy after the failure of all the "New Deals" to the American People (as stated in retrospect by FDR and Congress).

Before the name calling starts, just research the facts. As my references for the above posts are about three pages long (single spaced). And in 1990 (updated 1993, 2009) I wrote a Research Paper to US Government (over 2000 pages long, including appendices, references, logic charts, perth charts, mathematical formulae, timelines, solutions, etc.), that also indicated that a "Supernova" Depression would be starting between 2006-2010.

And before you say "Conspiracy Theorist", "Wearing Tin Foil Hat", etc., I am not the first to see this coming, Kurt Vonnegut, "Harrison Bergeron", 1961, the "Great Recession" leading to the Revolution that resulted in the "Equality Laws" (everyone by Law equally stupid and physically handicapped).

ReplyReport Abusedavid393071 #4Monday, February 01, 2010 8:26:40 PMnukaahaha - The problem is that US need save herself, no nation should count on others to save its economy.

Literally, what you stated would mean that we should tell Haiti to F**K off.

ReplyReport Abusechekc please #5Monday, February 01, 2010 8:40:02 PM

the Chinese will not magically become great consumers overnight, no matter what Beijing does. Unlike Americans, it is not cuturally in there nature to buy loads of junk they don't need. That may change in time, but it is not going to happen in our lifetime.

ReplyReport Abusenukaahaha #6Monday, February 01, 2010 8:43:23 PM

In fact i do, haiti was hell before the stupid earthquake, there were stronger earthquake in china 2008 and look what happened the Chinese did pretty well by saving themselves. why? because they are not the weak useless country that live on others pity. Look what we did to Africa years after years of aid and nothing good came out of it. Welfare were never the answer of any counties nor person.

Beside earthquake and economy downfall are completely different issue, i would love to help someone had car accident but i aret gona help someone that's draw into poverty.

ReplyReport Abuserosh2009 #7Monday, February 01, 2010 9:11:01 PMdavid393071 u r absolutely right. I am legal immigrant and I think you nailed it. Americans have bought this upon themselves. If Americans want to save themselves, then they need to take a lesson from the French revolution and protest.ReplyReport Abuselifeisfree #8Monday, February 01, 2010 9:38:31 PMThis is part of a previous post minus most of the hostile rant that followed it. This subject really gets me because American companies financed this whole economic power shift benefiting China. The information is researchable if you have the time. China is the new superpower. Check out all the articles on how fast China is taking the lead in all markets. China beat the U.S. in car sales last month. GM is building a $239 million dollar light truck plant in China. China also is pushing to remove the dollar as the international reserve currency. You might recall how the price of concrete and steel jumped while China was building the worlds largest power dam (Three Gorges dam 2006). Oil jumped due to demand from a growing industrialized China. They also provide 95% of the rare earth materials used to make the magnets for motors and generators. Those materials are the key components to green technologies. They are now taking the lead in the production of solar panels and wind turbines as well as increasing the number of coal powered electrical plants. Energy is power America! While China was making investments on technologies that guaranteed them massive returns in energy and manufacturing, the U.S. was investing in inflated shares of companies that were investing in inflated shares of other companies. China has kicked our backside with our own greed! While we argue over healthcare and environmental issues and who is too big to fail, China has positioned itself to be too big to stop! Search for articles about China's response to the U.S. selling weapons to Taiwan. Don't underestimate what China is capable of!ReplyReport AbuseLooking to join a great company #9Monday, February 01, 2010 10:28:21 PMHow about the United States saving the United States. Let's get out of debt and stay that way. We had a surplus of cash before and we need to again but it needs to stay that way. ReplyReport AbuseGiterdone #10Monday, February 01, 2010 10:37:22 PM

Economists must be going from designer Rose colored glasses every crisis. Housing will pull us out, Stimulus will pull us out, now China is going to pull us out. Thee is only one thing that is going to help the US and world economy, good old fashioned hard work. Fiscal responsibility, personal savings, independence in all areas of the world economy. US has to do what it does best, rebuild our manufacturing, develop our decaying infrastructure, quit hoping and praying that th