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27 Jun, 2012

Chinese Middle Class Key to Consumption

By Hong Liang (China Daily)

Beijing, 2012-06-26 (China Daily) – Economists have been talking for years about the need to boost domestic consumption to achieve more balanced and sustainable economic growth.

To be sure, consumer spending, especially in the larger cities, has been increasing rapidly in the past decade or so. But the rate of increase has persistently lagged behind GDP growth. As a result, the proportion of domestic consumption to the overall economy is lower than the ratio in the United States, Japan and many European Union countries.

It has long been noted that the over-reliance on exports to fuel growth exposes the economy to fluctuations in overseas demand and the prices of a wide range of raw and industrial intermediary materials, which are largely controlled by cartels of producers and foreign financial institutions that dominate trading in the commodity markets in the United States and Europe. What’s more, the country’s focus on exports has generated trade frictions with other countries, particularly the US, which has a large trade deficit with China.

The bulk of Chinese exports comprises goods manufactured under contract to US and European companies. Stiff competition is putting huge pressure on profit margins forcing contract manufacturers to cut costs in whatever way they can. The over-emphasis on cost control has contributed to keeping wages low and encouraged environmental neglect. Unlike the captains of capitalism in the US during the early 20th century, Chinese employers don’t see any benefit in paying their workers well because they don’t count on them to buy the goods produced by their factories.

Also the propensity to save is ingrained in traditional Chinese culture. This is now changing, albeit slowly, particularly in the cities where young working women are known to be willing to spend an entire month’s salary on a bag.

However, much more needs to be done to persuade China’s burgeoning middle class to loosen their purse strings. One proposal that has gained some traction is to lower the tax on luxury goods. But what’s the point? The luxury market anywhere in the world is remarkably price insensitive. There are reports that sales of yachts, luxury cars and designer clothing are rising in the US despite the sluggish economy, depressed property prices and high unemployment. Lowering the tax on imported luxury goods would only benefit the rich minority.

Any policy to encourage consumer spending must be aimed at middle class families. A major frustration to many Chinese consumers is market inefficiency and the lack of transparency, which have combined to distort the pricing of agricultural products and a wide range of essential goods.

In the face of rising inflation, the Shanghai municipal government took the initiative last year to address the issue. In a single stroke, the city abolished more than 200 fees and charges added to the retail prices of many goods. Mayor Han Zheng said it was the first phase of a long-term plan to enhance Shanghai’s administrative efficiency and transparency.

Not surprisingly, the response of residents in Shanghai to the wholesale fee waivers was overwhelmingly supportive. Without having to pay the numerous fees and charges, vendors can lower their prices and sell more goods, thus maintaining their profit margins.

Shanghai has set the example for other cities to follow. If they do, we won’t be reading about such absurd phenomenon as Shenzhen shoppers crossing the border to Hong Kong to buy vegetables from the farms in Shenzhen.