For China, a Shift From Exports to Consumption

By BETTINA WASSENERJAN. 20, 2014

The New York Times

HONG KONG — BoConcept, a Danish furniture company that has more than 260 stores around the world, opened an outlet in Hong Kong last week amid flashing cameras, the deafening noise of drums and cymbals and a pair of lion dancers performing a traditional ceremony aimed at bringing good fortune to the shop.

The store is the first in Hong Kong for BoConcept, but the company already operates 18 in mainland China and is planning another six to eight across the country as it bets that rising affluence will continue to lift demand for its sleek sofas and coffee tables.

“We see a lot of opportunities in China,” said Kim Moelholm, regional director for Asia-Pacific at BoConcept.

China is in the midst of a major overhaul aimed at weaning its economy off its decades-long reliance on often inefficient state-driven investment and a manufacturing sector that has been highly geared to exporting to the rest of the world.

Raising domestic consumption of things like cars, washing machines and furniture is a key element of this rebalancing effort. So whether Mr. Moelholm is right in his assessment is of great importance for the Chinese economy, as well as for the many other retailers, manufacturers and service providers — including Ford Motor, the clothing company Burberry and the hotel chain Marriott — that have been expanding in China.

“Consumption is a key element of China’s rebalancing act,” said Stephen Green, head of Standard Chartered’s Greater China research in Hong Kong.

Data released Monday underlined just how rapidly the overall economy has been cooling as Beijing has sought, over the past two years, to rein in often poorly allocated lending and close down inefficient or polluting industries.

After years of supercharged growth and annual expansion rates of 10 percent or more, the economy expanded at 7.7 percent last year, the national statistics bureau said Monday. That was above the government’s target of 7.5 percent and the same as in 2012, but many analysts expect the pace to cool further this year as Beijing’s “tough love” approach to overhauling the economy continues to crimp lending and industrial activity.

Similarly, factory output and investment in fixed assets, which have been losing steam over much of the past year, continued to do so in December, the data showed.

But retail sales, which give a sense of how spending among China’s 1.3 billion inhabitants is holding up, have remained relatively firm, and notched a gain of 13.6 percent in December. The data, said Yao Wei, China economist in the Hong Kong office of Société Générale, was a bright spot in the statistics released Monday.

“Consumption is not exactly booming, but it is likely to remain okay this year,” Mr. Green said.

Moreover, he said, official figures tend to underestimate the role that consumption plays in the overall economy, as unrecorded “gray income” supplements the actual wealth of many households.

Wages have risen as millions of Chinese have moved from the countryside into the cities. And because China is rapidly aging, this means it is gradually getting harder for employers to find and retain workers.

Official figures released by the statistics office on Monday put the increase in the disposable income of urban residents at 9.7 percent last year, or 7 percent when factoring in inflation. Rural residents’ net income rose 9.3 percent when adjusted for inflation.

That has made life harder for many exporters, who are finding it difficult to deliver goods inexpensively.

But it has also increased the spending power of people like Li Yang, 32, a financial officer of a ship-repairing company.

Mr. Li bought his first car, a BYD Qin worth 210,000 renminbi, or $34,700, last month.

“I feel confident about China’s economic outlook and optimistic about my career,” he said. “I don’t agree with the media’s exaggeration of short-term fluctuations. China is far from what they like to suggest being on the verge of collapse. There is still much room for growth.”

Mr. Moelholm, the BoConcept executive, likewise has witnessed big changes in the way many Chinese spend.

“When we first started in Shanghai, 15 years ago, modern, imported furniture was still very uncommon,” he said. “Now, we are still niche and premium, but it is not uncommon now for people to come into one of our stores and place orders for 100,000, 200,000 or 300,000 renminbi.”

The key question now is whether China’s consumption resilience will continue.

For China to generate more domestic consumption, said Richard Ho, who recently founded Athenee, a boutique advisory firm in Shanghai, it needs to foster a more vibrant private sector.

“If you can unleash the power of private enterprise and create a level playing field for private and state-owned businesses,” he said, employment and wage growth can continue — supporting domestic consumption.

“It’s a circle — they need to get the private sector right in order to get consumption going,” Mr. Ho said. “But it won’t happen overnight. For the next three to five years at least, the authorities will have no choice but to pump more ‘cold medicine’ into the economy, in the form of investments into fixed assets like infrastructure and plants.”

The authorities have begun to clamp down on official bank lending and “shadow” banking activities outside the regulated sector over the past year in a bid to reduce the risk of potential defaults further down the line. But a surge in these activities and in debt accrued by local governments since the global financial crisis means it will be hard to avoid at least some defaults, many analysts say.

“Our concern is that problems in the shadow banking sector could spill over into the formal banking system,” said Tom Byrne, a senior vice president and manager for Moody’s Sovereign Risk Group.

Chinese state-owned banks are well capitalized, he said, and as long as the economy manages growth of about 7 percent without generating still more rapid credit growth, he said, the banking system is likely to be able to absorb any losses. If economic growth slows to 6 percent, he said, “maybe. At 5 percent, probably not.”

At the same time, however, the restrictions on lending also risk hurting economic activity, so Beijing will have to be careful not to roll back state investment and lending too rapidly, analysts caution.

All of this makes it all the more crucial that China’s structural overhauls — which were outlined in fairly broad terms at a party meeting in November — bear fruit quickly.

“This is a make-or-break year for China,” said Mr. Green, the Standard Chartered economist.

Mr. Green said he was a “cautious bull” on China.

“But if we’re here next year and can’t point to a few substantive reforms, then we can start to worry a bit more,” he said. “We need to see the rubber hitting the tarmac this year.”

Keith Bradsher, Alan Wong and Chris Buckley contributed reporting.