Chinese are Spending

Although China is famous for its enormous savings rate, Chinese people are opening up their wallets during the financial crisis.

From The Wall St. Journal:

Photo from Daylife.com

BEIJING -- Prime Minister Wen Jiabao said Beijing's stimulus measures are helping consumer spending and growth, and while he warned of some "prolonged difficulties" as the financial crisis spreads, foreign auto makers and other manufacturers already are seeing an unexpected rebound in sales in China.

The resilience of Chinese spending contrasts with sharp cutbacks by American and European consumers, and may help China recover faster from the financial crisis.

Mr. Wen said consumption growth has been especially fast in less-prosperous central and western regions, and auto makers' results support that claim.

A torrent of bank lending, spurred by the government, is increasing investment in China. Consumers are out shopping in response to incentives such as lower mortgage rates and tax cuts on car purchases.

Economic growth slowed to 6.1% in the first quarter, as retail sales, after adjusting for price changes, rose 15.9% for the period. While that was slower than the 17.7% rise in spending in the fourth quarter of last year, economists say the growth in consumption is encouraging given rising unemployment in the country and the contrast with shrinking consumption in other major economies.

Mr. Wen has stressed that "confidence is more important than gold or money," and consumer spending levels suggest Beijing's efforts to boost morale are working.

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China's in a much better position compared to the West, and particularly America, because it can, to some degree, spend its way out of its problems. Whereas America is throwing its money into black holes of toxic assets, China can actually do productive things with its money.

The West got so addicted to debt and spending that the only thing its citizens can do at this critical juncture is deleverage and stop spending so much. Racking up debt is a foreign concept to Chinese people. They've only bought and only buy things that they can afford. Such novel concepts.

In addition to being traditionally frugal, China is also unique in that while the eastern regions of the country are already very built-up, the interior of the country is still largely undeveloped. So China can build-up its less-developed parts while the coastal cities are in trouble.

Again, the conundrum that is China. It's a massive, relatively modernized economy, yet it's largely debt-free and still has considerable under-developed areas where it can focus its resources and energy.

The only concern about this news of rising spending rates is that the momentum seem to be based on China's stock market success. From the WSJ article:

Mr. Walker says that while his customers, who can afford to spend more, aren't influenced by state subsidies on car purchases, China's buoyant stock markets are helping. "At the moment all the signals we're getting look positive" for a good year, he says.

I've been talking recently about the amount of free-flowing credit going into the stock market and whether China's gains are in fact a "suckers' rally."

Whether these are serious problems will be known in time. But for now, China can use its unique status as a country whose citizens aren't mired in pyramids of debt and whose interior is ripe for development to its advantage.