China is the word on every investor's lips. Its demand for our exports, industrialisation and impact on the global economy is enormous. But there are risks, too. We've just returned from a research trip to China. We met with economists, professors, hedge-fund analysts, dot.com company leaders, everyday consumers, and manufacturers from a wide range of different industries. Here are 3 big China myths that it's about time we all dropped:
Myth #1: The Chinese people have a cultural bias that makes them big savers
We met with Michael Pettis in Beijing, a renowned expert on the Chinese economy, and Professor of Finance and Economics at Peking University, who was quick to dispel this myth. As Pettis notes in his excellent book, The Great Rebalancing:
"High Chinese savings … are largely a consequence of domestic policies that constrain consumption, and have little to do with cultural values."
China's sky-high savings rate is actually the result of policy – not culture. Its miraculous economic growth has been realised through huge distortions which favour investment over consumption. There are three primary ways that the government implements this investment bias: constraining wage growth, maintaining an undervalued currency, and keeping interest rates artificially low.
To give an example of how one of these mechanisms work to increase savings, imagine that the Aussie dollar dropped by half tomorrow. The price of imports would immediately double, which means Australian households have less money left over with which to buy local products. As a result, households must reduce their total expenditure on foreign and local goods in order to maintain their desired balance between savings and consumption.
With your Aussie dollar salary staying the same, and with less being spent, your savings rate would immediately increase. And all without having learned a thing about Chinese culture!
China's huge savings rate is primarily caused by its unbalanced investment-led growth model – not an innate savings culture.
Myth #2: Rural to urban migration will save China from any overbuilding problem
Over the next decade, the Chinese government plan for another 200 million people to migrate to cities, or around 20 million per year. Assuming an average of 2.5 people per household that means there will be demand for an extra 8 million urban dwellings a year.
But, researchers at China's Southwestern University of Finance and Economics found that 49 million sold Chinese apartments were sitting empty, waiting for a family to move in. That is 22% of all apartments nationwide.
China could stop building apartments tomorrow and have "enough empty apartments in China to house 6 years' worth of urban migration".
China's upcoming urban migration is big – but the scale of overbuilding is even bigger.
Myth #3: If Chinese GDP growth falls to 2% or 3% it means the Chinese consumer growth story is doomed
Ok, it's about time for some positivity! And there's good news. Great news actually. Yes, China's economy is massively unbalanced, with the government having used every trick in the book to boost investment, at the expense of households. But that distortion also means that there is a huge coiled spring sitting under Chinese consumption.
Chinese household consumption is currently sitting at around 34% of GDP. A level so low that it is unprecedented in economic history anywhere. For some context, U.S. household consumption is around 70% of GDP and in other major Asian economies it is around 55% to 60% of GDP. China's GDP is currently a little over 10 trillion U.S. dollars. Which puts household consumption at around the 3.4 trillion dollar mark.
If the Chinese economy didn't grow at all, but instead just gave households a fairer shake, it could unleash a vast wave of consumer spending. If that 34% share increased to 55% of GDP, China could add a whopping 2.1 trillion dollars of consumer spending each year. That would be a huge increase in the standard of living for the average Chinese citizen. It would also mean a heck of a lot of extra demand for Australian products, services, and tourism.
