My Diary 492 – Can Asian and Chinese Consumer save the world?
December 7, 2008
It's a reminder that 2008 is the year of the contrarian. As it began and a global recession loomed, the so-called BRICs -- Brazil, Russia, India and China -- were supposed to save us. Even in three months ago, Asia's two nascent superpowers were said to be immune from the credit crisis gripping developed nations. Now, both countries are suddenly looking inward and fretting over the destabilizing effects of sluggish growth. Indeed, as consumers across the West cut back on purchases, it’s tempting to believe that the world might be saved by a resilient Asian shopper (not this quarter perhaps, but ultimately). Over the past five years, in fact, private consumption spending in Asia ex Japan rose on average by 12.8% every year in nominal USD terms, well above the pace seen in the United States during the period (5.7%).Can Asia offset the current slump in spending in the West?
Not quite, but we are slowly getting there. Consider the size of US consumption spending in nominal USD terms, which amounted to almost USD 10trn in 2007, against the equivalent number for Asia. A few observations stand out.
First, the US market is still considerably larger than Asia. But, private consumption in Asia ex Japan has risen rapidly as share of US household spending from less than 19% in 1990 to over 37% last year.
Second, even though Asian consumption is still smaller than US spending in absolute terms, incrementally it is beginning to have an impact. Consider the following: if US household spending contracts by, say, 2% next year, this would shave about USD 200bn off American expenditure. But, if Asian spending expands about 5% in nominal terms, which is a reasonable assumption as well, than this would add roughly USD 180bn to total household purchases, almost offsetting the US decline.
Third – and here comes the bad news – global private consumption spending is still bound to decline. The main reason here is that we still need to account for Europe and Japan. A 2% decline in Europe and a 1% decline in Japan, would reduce household spending by about USD 140bn and USD 25bn, respectively. Ignoring other parts of the world for a moment, our simple calculation suggests that global spending may fall by some USD 185bn (though don’t take these numbers too literally).
Bottom line: Asian shoppers are indeed growing more important, but they still have insufficient muscle to carry the world.
If Asian consumer collectively is not going to help on this time around, it is funny to believe that the world is relying on China to provide a large part of the incremental growth next year.
In 2005, China vaulted past the U.K. to become the world's fourth-largest economy, after expansion averaged 9.9 percent annually for the previous 30 years. GDP has increased 69-fold since Deng Xiaoping began free market changes in 1978. China accounted for 27 percent of global growth last year. China has room to spend even more than already announced because it has debt equal to 15.7 percent of gross domestic product -- compared with 75 percent in India -- a budget surplus and the world's largest currency reserves at $1.9 trillion..
However, such an argument forgets that China's mercantilist model leaves it dangerously dependent on U.S. consumers, now in the midst of a huge clampdown on spending. And China missed its chance to revalue its currency at a higher level to stimulate the domestic demand it lacks. The world's most-populous country needs to grow closer to 10 percent to generate the jobs needed to contain social unrest. You would think China's recent 4 trillion yuan ($586billion) stimulus plan would fall into the forceful category. Yet Beijing's plans to spend a fifth of gross domestic product were more spin than reality. Much of it was a tally of existing efforts, and economists were quick to call China on it.
However, to boost Chinese domestic consumption is not so easy. November manufacturing PMI collapsed to a new historical low at 38.8, following the previous record at 44.6 in October. The second consecutive month of well below 50 .The breakdown suggests that both external and domestic demands are weakening. Nov new exports orders subindex plunged to 29, from 41.4 in Oct, the fifth consecutive month in the contraction territory. Waning domestic demand is indicated by the weak new orders subindex (32.3 vs. 41.7 in Oct), the low output subindex (35.5 vs. 44.3 in Oct) and shrinking inventories subindex (39.5 vs. 42.6 in Oct). In other words, the softening demand, together with plumping prices forced manufacturers to cut output to reduce their inventories. And the manufacturers are likely to keep de-stocking until 1Q09 before the stimulus package filter through.
Within China, domestic consumption is the lever that the government is focusing on. For consumption, the big drivers in urban areas (housing and related, cars) are weakening for cyclical reasons so a big initiative by the government is to jump start rural consumption.
Recently, China is expanding a govt subsidy program to farmers in 10 more provinces & cities to buy household appliances, aiming to sell 480m units worth Rmb920b in 4 years to spur domestic demand. Farmers in 14 provinces can buy TV sets, refrigerators, washing machines and mobile phones at a 13% discount. The remaining 22 provinces & cities will kick off from Feb 1, 2009 till Jan 2013. Ironically, I think, the whole world is hoping for some of the poorest people on earth, i.e. Chinese farmers, to spend and save us.
Building is the biggest driver of China's expansion, contributing a quarter of fixed- asset investment and employing 77 million people. Construction of homes, offices and factories fell at least 16.6 percent in October after rising 32.5 percent a year earlier, according to Macquarie Securities Ltd.
Despite the recent media reported about housing sales volume rebound in major cities, most developers are still expecting tough times ahead. Experts say: 1) Developers rushed out a lot of new projects in November after the rate cut and interest rate discount policy, which contributed to the rebound; 2) Most those statistics are MoM, which is using Oct’s low base. Both developers and home buyers were hesitating in Oct given uncertainties in government policies, as a result many transaction in Oct was delayed into Nov; 3) given the challenging economic outlook, not only the investment demand will be gone, a lot of self-use demand will also be delayed. Even based on the plans of local government released in 1H08, the main cities have planed to significantly expand social welfare housing construction. Based on our estimates, those planned developers could account for an average 25% of total construction commencement area in 2008 and 2009, significantly up from the average 7% in the period of 2005-07. Moreover, if we compare directly the estimated 09 public housing supply with the estimated 09 residential housing transaction volume, public housing could significantly change the structure of the whole property markets in many cities such as Beijing (80%), Tianjin (69%), Shenzhen (71%), Nanjing (55%) and Wuhan (67%), especially the low-to-middle end residential segment.
In sum, without more rate cuts and government spending, China is unlikely to contribute the 60% of global growth Merrill Lynch & Co. forecasts for next year, further slowing the world economy.
We have a big macro week in China next week. On the inflation front, I expect the rapid disinflation trend to continue, resulting in further easing in November CPI, PPI and RMPPI. Policy easing (RRR and rate cuts) should continue to provide support to loan growth whilst M2 growth probably remained stable. Much focus will be on retail sales and fixed investments as domestic strength is critical to overall headline growth given deteriorating external conditions. We expect some, though not severe, softening in November retail sales growth, partly attributable to easing inflation.
Consensus
Dec 10 Nov PPI 3.6%
Dec 11 Nov CPI 3.1%
Dec 12 Nov retail sales +20.4%
Dec 15 Nov IP +7.5%
Money supply +14.9%
