By John Richardson
OLD data doesn’t always go away. What instead sometimes happens is that people slightly adapt their old growth forecasts to suit changing events.
“The rapid growth of China’s service sector and its consumer-led economy” has thus become the new catch phrase used to justify numbers that look only slightly different from those that were around before 2013.
The in vogue catch phrase used to be “the rapid growth of China’s industrialisation and urbanisation”. Now, though, it is widely recognised that recent industrialisation has left behind severe economic problems. Equally well understood is that the movement of vast surplus labour to China’s cities has pretty much run its course because of a rapidly ageing population.
But what too many people are now assuming is that a vast new army of “middle class” Chinese shoppers will almost immediately replace all the lost growth momentum from slowing industrialisation and urbanisation. This is just plain wrong.
The effects of debt on consumer spending
I actually don’t take issue with the new catch phrase’s underlining premise. Where I disagree is on timing.
The amount of loans, bonds and shadow finance arranged to cover interest payments in China is forecast to rise by 5% this year to a record Yuan 7.6 trillion, according to Beijing-based Hua Chuang Securities Co (see the above chart). The FT has estimated that China’s interest debt is equivalent to 17% of GDP – the same size as as India’s economy. Until or unless these debt problems are resolved, they will continue to act as a drag on consumer spending.
Here are four effects of China’s debts on autos – one of the major end-use markets for chemicals and polymers.
- You cannot get a new car loan as easily these days because the growth of credit is slowing down.
- Even if you can get a loan for a new car, you know that harder economic times are ahead and so why spend the money?
- You also know that if you wait another six months, the car you would like to buy is going to be cheaper because of deflation.
- And perhaps in these difficult times it would make more sense to buy a second-hand car.
China’s “middle class” and its ageing population
“Most Chinese citizens have a long way to go before entering the middle class,” wrote the US-based think tank, the Demand Institute, in a report released last week.
China’s annual per capita consumption should rise from $2,669 in 2014 to around $4,400 in 2025, the study found. This would be a great increase but still far below most wealthy countries such as the US, where per capita consumption today is $32,000, added the institute.
This supports an argument that I have been making for several years, which is that it will take several generations for China to be as rich as the West on a per capita basis. Can this ever happen?
China’s 65+ population is forecast to grow to 167 million by 2020, accounting for 11.5% of the population or nearly double what it was in 1995, according to the World Economic Forum (WEF).
“Retirement and nursing homes are still relatively uncommon and especially in rural areas the healthcare infrastructure is unable to provide optimal care for the elderly,” the WEF added:
“In addition, the elderly are more likely to suffer from chronic non-communicable diseases such as cancer and cardiovascular disease, which have become more prevalent due to China’s rapid industrialisation and urbanisation. These chronic illnesses account for 85% of all deaths in China and require some 70% of medical resources, putting great stress on the health system as a whole. It is clear the healthcare system needs to adapt,” said the forum.
Caring for China’s rapidly growing population of elderly people is obviously a huge long-term opportunity as well as a challenge. But here’s one more very important statistic: Between 15-25% of 1980-2010 GDP growth was due to China’s favourable age structure.