China overtakes US in big-ticket purchases

China overtakes US in big-ticket purchases

For the first time, Chinese will buy more cars this year than Americans. Demand is so high that drivers put their names on long waiting lists for the most popular models.

“I’m disappointed, but what can I do?” said Zhang Ge Lu, a 28-year-old interior designer. He came recently with two friends to a row of dealerships in southeastern China to buy a black Toyota RAV4, only to be told that he would have to wait two months for delivery.

And it is not just cars. For more and more consumer goods, China is surpassing the US as the world’s biggest market — from cars to refrigerators to washing machines, even desktop computers. The Chinese market is “on full tilt — booming is an understatement these days,” said John Bonnell, the director of Asia vehicle forecasting at JD Power & Associates.

China is pulling ahead at this particular moment partly because Americans, debt-laden and worried about their jobs, are pulling back. After decades of gorging on consumption, Americans are saving. And the Chinese, whom economists thought were addicted to saving, are spending more.

Among China’s 1.3 billion people, rising incomes are finally making large numbers of Chinese prosperous enough to make big-ticket purchases. The question is: Will they keep spending? The Beijing government is increasing consumption with rebates, subsidies and heavy bank lending. Whether China can turn the spending spree into the seeds of a true consumer society matters not just to China, but to the world.

For years, the West has pushed China to increase domestic consumption and reduce its dependence on exports — that’s because its overdependence on exports has distorted global trade.

To keep its export machine humming, China kept its currency undervalued to make its goods more competitive in foreign markets. The county beggared its own citizens, keeping salaries and bank deposit interest rates artificially low to support exporters.

China’s trade surpluses and intervention in currency markets have led it to amass $2.27 trillion in reserves, mainly in US Treasuries, mortgage-backed securities and other dollar-denominated investments, helping to keep interest rates low and finance Americans’ borrowing. Chinese parsimony enabled American profligacy.

If the Chinese buy more and Americans save more, a more stable global economic exchange can take shape. That does not mean crises will disappear, but Americans will have to spend less, rather than borrowing so much, and China will be able to buy more of its own goods, building up less lopsided foreign reserves. In the meantime, China’s rapid consumption growth is good news for the whole world. For the first time, China, not the US, is the locomotive helping to pull the global economy out of recession.

Automakers are on track to sell 12.8 million cars and light trucks in China this year, virtually all of them made in China, compared with 10.3 million in the US. Appliance manufacturers expect to sell 185 million refrigerators, washing machines and other kitchen and laundry equipment in China this year, compared with 137 million in the American market.

In desktop computers, China moved solidly ahead of the US in the third quarter, buying 7.2 million compared with 6.6 million in the US. Retail sales are growing 17 per cent a year in China after adjusting for inflation, almost twice as fast as the overall economy.

Scope for credit cards

Credit card spending rose 40 per cent in the first nine months of the year compared with the same period last year, yet China still has just one credit card for every eight people, compared to two credit cards for each American man, woman and child.

While it is spreading creature comforts, China’s lending-based prosperity may also be sowing the seeds of future economic problems. China’s Banking Regulatory Commission recently told banks to show restraint in lending for the rest of the year, fearful that some of this year’s loans could become bad debts in the next several years, as happened with the mortgage lending spree in the US.

The size of China’s consumer market, notwithstanding its growth, will make it hard for China to rescue the world economy by itself. Total consumer spending in China is still less than a sixth of American consumer spending at current prices and exchange rates. That is mainly because China has relatively few restaurants, hotels and other service businesses, even as sales of manufactured goods have risen.

The average new car sells for $17,000 in China compared with almost $30,000 in the US, according to JD Power. This is because Chinese consumers buy more subcompacts and fewer sport utility vehicles. While the Chinese market is one-quarter larger in the number of cars sold, the American market is still about two-thirds larger in dollar terms. Similarly, the US market for household appliances is a third larger in dollars, even though the Chinese market is a third larger in the number of appliances. Cooking ranges in China are sold for countertop installation without a lot of other equipment, for example.

But in some sectors, Chinese buyers are already proving more lavish than Americans. The average flat-panel television sold in China is bigger than in the US, according to AU Optronics of Taiwan, the world’s third-largest manufacturer of flat-panel televisions.

When car sales began surging early this year, many auto executives attributed the boom to government incentives. To stimulate the economy, the government has offered rebates for rural families to buy cars and household appliances, and has cut sales taxes on cars with small engines.

But the boom has broadened to categories that barely qualify for incentives. SUV sales rose 72 per cent in October from a year earlier. At Nissan, sales of cars with larger engines that do not qualify for the sales tax reduction are growing even faster than sales of small-engine cars.

Auto sales jumped 42 per cent in the first 11 months of this year compared with sales in the same period last year. And sales are still accelerating, soaring 96 per cent in November compared with the same month a year ago. Auto sales in the United States plunged 37 per cent last month on the same basis.

China’s consumers have the potential to buy even more in the years ahead. The savings rate is close to 40 per cent — and will remain high unless and until Beijing creates a social safety net for things like health care or retirement, which would encourage Chinese to spend more today.

And though annual incomes still average just $2,775 a person in cities and $840 in rural areas, western economists predict the economy will grow almost 12 per cent in each of the next two years and the renminbi is widely expected to appreciate someday, further increasing consumers’ buying power.