Why consumer confidence in China has declined long-term
China’s long-term consumer confidence decline
The below graph reflects the long-term decline in consumer confidence in China. Consumer confidence remained at high levels during the investment and economic boom in the United States leading up to the dot com collapse in 2000, though it recovered in sync with the US economy post–Bush tax cuts, up until the recent global economic crisis. Since 2008, China’s consumer confidence seems to have experienced a much larger decline than the US, suggesting that the “soft landing” scenario in China might change to a bumpy landing.
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This series explores the implications of China’s transition to a more consumer-oriented economy in the face of decelerating export growth and soft global economic growth. As suggested in a prior series, if China wants to hit its target growth rates of 7.5%-plus per annum, it will need to grow its domestic economy, as heavy reliance on the US and European consumer will likely be more challenging in the future than it was prior to 2008.
Nothing exceeds like excess
In the US, there has been an ongoing trend in consumerism since the Regan era of the 1980s, with consumption as a percent of GDP growing from nearly 60% to 70% of US GDP. Despite economic shocks, including the 2008 crisis, the American consumer seems to continue to get back on his or her feet and consume at very high levels, though the rate of outright growth in consumption has slowed.
It took a while, but Japan caught on
In Japan, consumption has languished since its economic growth decelerated after 1990, though attention is being drawn to a potential resurgence in the Japanese economy under “Abenomics” and its aggressive reflationary policies. Nothing succeeds in growing an economy like excess in consumption, though in the case of the US, you could argue that consumption and government spending have constrained the growth of investment—to the long-term detriment of the economy and consumption itself. As pointed out in a previous Japan series, Japan has just recently grown domestic consumption to the 60% level—the same level in the US when Ronald Reagan took office. With Abe’s economic policies being put in place, Japan could make further “progress” in growing consumption—though perhaps without the side effects of excessive consumption and the crowding out of investment, as could be the case in the US.
While China’s historically high savings rates have been great for developing investment capital, the deceleration in export and economic growth is becoming a potential issue. With the US and European governments running large deficits to sustain consumption, China may not wish to look to the strong economies of the West to grow its economy through robust export growth rates and greater levels of consumption as a percentage of their economies.
China can continue to do so, though, as pointed out in the prior series on China’s exports, economists are becoming concerned that China’s $3.3 trillion foreign exchange reserves bubble is starting to distort the global economy in the form of a trade surplus bubble plowed into (mainly) the fixed income markets in the US and Europe. Yes, that’s great for low rates on mortgages in the US and Europe, but with deteriorating labor markets in the US and Europe, perhaps we could do without the favor. The cheap financing may have gone too far for too long, and perhaps now the post–Reagan era consumption binge has finally led to apparent under-investment in the US and Europe, and has eroded the long-term growth rates of the economies. As they say in Japan, “Chotto shinsetsu ga ii, kedo”—a small kindness is nice, but… a large one becomes an imposition.
For investors who think China can orchestrate a smooth deceleration in economic growth without significant disruptions to the banking system and also contain inflation, enhance productivity, manage investment growth, and grow domestic consumption, perhaps the weakness in Chinese equity prices over the past two or three years would present a more attractive price. China’s iShares FTSE China 25 Index Fund (FXI) is down roughly 15% from its November 2011 post-2008 highs. For China skeptics seeking to embrace the more recent economic trends seen in Japan and the United States, as reflected in Japan’s Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan (EWJ), as well as the USA S&P 500 via the State Street Global Advisors S&P 500 SPDR (SPY) and Blackrock’s S&P 500 Index (IVV), the US and Japan markets may appear more attractive than China’s iShares FTSE China 25 Index Fund (FXI) and South Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further analysis as to why Chinese equities could continue to underperform Japanese equities, see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.”