Shareowner: CHINA'S: Culture of Consumerism

We've heard a lot about China recently and how it might dramatically change the world's balance of economic power. Maybe it will. But wasn't there similar hype about Japan in the early 1990s? Isn't Japan's stock market still down about 50% from its high then?

A recent issue of the Alger Market Commentary contained a well-written and insightful perspective on China's emergence on the world's economic stage. The material that follows is an excerpted and edited summary of that article.

...The China story, for all the press it's received, is still misunderstood.

Big Consumer

China represents a dramatic change in the global economic landscape because it is becoming an avid consumer of commodities, goods and services, not because it is a low-cost producer.

China's Consumer Culture

The Chinese consumer is a dynamic change factor in the global economy. It's estimated that by 2015, China will surpass the United States as the driver of global growth. That doesn't mean that China will spend more than the United States, but rather that the combination of absolute consumer spending in China plus the rate of annual growth will contribute more to the global economic expansion than U.S. spending. That's still a decade away, but since 1945, U.S. spending has been the primary driver of the global economy. By 2015, the number of Chinese consumers will approach 150 million, each with a purchasing-power equivalent to a $40,000 annual income (or about $10,000 per year not adjusted for purchasing power). The result: China will become the world's shopper.

Unlike Japan in the 1980s and 1990s, China has a culture of consumerism. What does that mean? In essence, the Chinese are like Americans in that they have a seemingly endless appetite for stuff. They also have an extremely large internal market, which is only starting to be developed.

There is still a very high savings rate in China (above 40%), but not because of an inherent conservatism about money, but rather because there have been so few appealing outlets to spend - until now.

The surge in real estate, in low-end electronic goods, in gambling in Macau, in clothing and entertainment in the burgeoning cities (and there are more than 100 cities in China with more than 1 million people) has only begun.

This is not a prediction of the seamless emergence of China. One risk that we rarely hear on Wall Street or Main Street is that China will surprise us by moving more quickly and with fewer disruptions than people expect.

China as a buyer is already shaping global energy and commodity prices, and more than a few of the Fortune 500 companies look to China as their best opportunity for growth.

Those companies are defining their businesses as global, and while the United States is a bulwark, it is not necessarily the focus of future growth.

Investors in U.S. traded securities have to be sensitive to the global nature of prices and markets. Whether they are or not, the companies they're investing in must be.

In short, the China effect is a variable that investors can't ignore, whether or not they make any investments outside of the United States. China is a significant factor for most of the companies currently listed in the United States because it will influence everything from interest rates to the sale of U.S. Treasury notes (China currently holds about $180 billion of the U.S. debt), to the cost of goods and the opening of new markets.

We've been looking for areas of dynamic change for 40 years, and today, all roads lead to China...