Sceptics should not underestimate the Chinese consumer
Data on China can be clouded at times but even cynics should realise that the Chinese consumer cannot be underestimated
There has always been a degree of suspicion and cynicism among investors towards the accuracy of the data released from China.
Equally so, there seems to be a belief that China largely relies on fixed investment to drive sustainable growth. Little has changed over the past decade in that respect.
However, months after Wen Jiabao, the Chinese premier, called for a re-orientation from an infrastructure-led to a domestically-focused economy, the latest statistics revealed that roughly 75 per cent of the gross domestic product (GDP) growth in the first quarter of 2012 came from consumption.
This is when the sceptics pounced, citing the recent weakness in GDP data as evidence China almost solely relies on investment and property growth. These doubters also believe the recently announced GDP target of 7.5 per cent is evidence that the investment boom is over and China will now exhibit much slower growth as it transitions to a consumer-led model of growth. We disagree.
There may be a valid argument that seasonality has played a role in growth patterns over the past four years, with first quarter consumption traditionally outpacing investment. But there are also good examples to show that consumption may already be a larger component of GDP than commonly believed, with the role of infrastructure and exports currently misreported in the official data.
Using results from a survey conducted in 64 cities in 19 provinces, one major study estimated that total household disposable income in China was underreported by 66 per cent in 2008 data.
The market admittedly did not take to the 2012 targets outlined by Wen Jiabao last month, namely 7.5 per cent GDP growth and 16 per cent fixed asset investment (FAI) growth. However, one needs to put what the premier said in context.
The official growth target for the current 5-year plan starting in 2011 was 7 per cent. However, 2011 growth was stronger than this. The growth plan for the previous five-year plan was 7 per cent, but GDP growth averaged 11.2 per cent for this period. The GDP target was not a real target then, and it is not a real target now. The FAI target of 16 per cent cannot be taken at face value also.
The 2011 target was 18 per cent, while actual FAI came in at 24 per cent. Hexam still expects GDP growth above 8 per cent and FAI growth of 20 per cent in 2012. This will be aided by loose monetary and fiscal policy, with easing property restrictions during the second quarter.
What matters in respect to China is the big picture, as well as an historic perspective. What can stop China from tilting its economy further towards domestic consumption on a par with what we have seen many times around the world in the past? Nothing. If anything, China has an ability to increase consumption without overburdening its consumer base with credit card debts and excessive borrowing – a luxury not many global economies can afford.