Welcome to the Future of the World Economy – a Young Chinese Female with Six Pockets

Beijing, 6 May 2009. Meet Chun Hua. Fittingly enough, her name means Spring Flower, but she prefers her nickname Pinky. She could very well determine your future wealth and happiness.

Beijing, 6 May 2009. Meet Chun Hua. Fittingly enough, her name means Spring Flower, but she prefers her nickname Pinky. She could very well determine your future wealth and happiness.

Pinky is a 28 year old executive at a Chinese government-owned enterprise, working in their Beijing office. She is deeply nationalistic and confident, believing both that China will soon re-assume its position as the most important country in the world, and that her career will be a part of that process. And did we mention she likes to shop?[br]

‘Chanel, Gucci, Prada, Apple, Cherry, condo – I want it all,’ says Pinky, without the slightest irony. ‘If I see something I like I just buy it. I spend all my salary, and then I dip into my other six pockets as well.’

If you hang around economists long enough, you will hear them talk about structural imbalances. They had been particularly concerned about the fact that consumers in the United States, UK and similar countries loaded up on debt and spent more than they earned. At times in the last decade, the Household Savings Rate even turned negative. That works well enough when asset prices and wages are rising, but when they start to fall – well, you know all about what happens next. The effects of rapidly selling off assets as their values fall, reining in spending and starting to save have unleashed the worst economic crisis in the developed world in the post-war era.

You probably also know that Asian consumers are supposed to be thrifty. The Chinese in particular have a history of stashing money away. Most disposable income has historically been saved as cash or transportable equivalents such as jewellery. [br]

But saving money is a good thing, right? The west should have been more like Asia, surely? Not if you are structural imbalances wonk, and look at the macroeconomic picture. The problem with money that is saved primarily as cash is that it is effectively has no economic value. To save the world, not only do Americans and Brits need to start saving more, the Chinese (and other Asians) need to start saving less and spending more. But how do you get a thrifty nation to start spending?

As it turns out, instituting a One Child Policy is a great place to start. In 1979, worried by population growth and all the problems of poverty, social unrest, infrastructure needs and environmental impact that came with it, the Chinese government limited the number of children that couples could have to one each (with some exceptions). It is claimed over 350 million births have been prevented since.

As of 2007, 43.1 per cent of the population had been born during the One Child Policy era – a stunning 567.7 million people out of a total population of 1.322 billion. Of those approximately 18 per cent, or 238 million people, are aged 20 – 30.

So now we have 238 million single kids, in a country that values family above most other things. Spoilt doesn’t begin to describe Pinky and her cohort, who have been dubbed the Phoenix Generation. With two parents and four grandparents, there are six thrifty pockets who just don’t have enough children and grandchildren to lavish their hopes, dreams and money on.

Not only is Pinky addicted to debt, she can sustain that lifestyle for decades to come. She is so confident that her star is rising she is sure that regardless of how much she spends now, when she finds her similarly confident Phoenix Prince, their coffers will be even fuller than those she draws on.

Pinky and her friends are starting to show up in the official statistics. China’s GDP grew 6.1 per cent in Q1 2009, with consumption contributing 4 of those percentage points. Retail sales grew 15.9 per cent in that period, while urban disposable income rose 11.2 per cent (with the six pockets fuelling the remaining 4.7 per cent in high street sales). For the first time ever, Chinese auto sales have overtaken the US, making China the largest car market in the world.

Nielsen’s recent consumer confidence survey in 50 countries found that Chinese consumers are the most confident in the world. They believe that the slowdown will lead to bargains, and that now is the best time ever to shop.

In ten years time, there will be more than 700 million Chinese born after 1979. Over 450 million of those will be aged 20-40, spending more than their total income consuming products, in what will then be the second largest economy in the world. As their income levels rises (and as Americans real income levels fall), Pinky and other Princes and Princesses of the Phoenix Generation will become the main demand driver of the world economy.

Let us all pray they keep spending with abandon.

Juan Abdel Nasser, EconomyWatch.com