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Whither the Chinese Consumer?

Summary:
Between 2010 and 2017, consumer spending in China increased by almost trillion dollars, and global brands came to rely on the Chinese market for a growing share of sales. But now that Apple has revised downward its expected revenues, citing slowing Chinese growth, the outlook for such firms – and for the world economy – has dimmed. WASHINGTON, DC – For most of the past decade, the growing spending power of China’s expanding middle class has fueled the global economy. After the 2008 financial crisis, I argued that the United States and China would need to swap places – with the US saving more and consuming less, and China doing the opposite. Until the past year, that is largely what had been happening. Not so anymore.

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Between 2010 and 2017, consumer spending in China increased by almost $3 trillion dollars, and global brands came to rely on the Chinese market for a growing share of sales. But now that Apple has revised downward its expected revenues, citing slowing Chinese growth, the outlook for such firms – and for the world economy – has dimmed.

WASHINGTON, DC – For most of the past decade, the growing spending power of China’s expanding middle class has fueled the global economy. After the 2008 financial crisis, I argued that the United States and China would need to swap places – with the US saving more and consuming less, and China doing the opposite. Until the past year, that is largely what had been happening. Not so anymore.

Last week, Apple published a letter to shareholders revising down its expected revenues for the first quarter of 2019, citing an economic slowdown in China, which has become an increasingly important market for iPhone, Mac, and iPad sales. Though tech industry analysts are debating whether internal dynamics at Apple might also explain the change, the company’s new guidance nonetheless adds to the evidence that Chinese consumption is slowing.

A sustained decline in Chinese consumption would be even more worrying than the current US-China trade dispute. Given that US trade policies and other external influences should not have much effect on domestic Chinese spending, the problem may be more deeply rooted in China’s economic model.

To understand what is at stake, consider all that has changed just within the past decade. At the end of 2010, domestic consumption accounted for around 35.6% of Chinese GDP, according to official Chinese data. That was remarkably low compared to most other economies, not least the US, where consumption accounted for almost 70% of GDP. In nominal dollar terms, China’s domestic consumption thus was around $2.2 trillion, or almost five times lower than that of the US ($10.5 trillion).

Yet China’s high overall growth rate meant that Chinese consumers could potentially play a much larger role, with far-reaching benefits for global brands such as Apple, BMW, Burberry, Ford, and many others. As of 2017, Chinese consumption as a share of GDP had risen to 39.1%, representing just over $5 trillion in nominal dollar terms. That is an increase of almost $3 trillion in just seven years. And though Chinese consumer spending still lagged far behind that of the US ($13.5 trillion in 2017), the gap has narrowed.

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