China's effort to turn its economy into more of a consumer-oriented system, in part to weather the global financial storm, has shown some progress. But a closer look at two of the touted hallmarks of that success — rising rural consumption and a revival of residential real estate sales — suggests they may not be the leading indicators of a sustainable shift in China's economic patterns.
One of the mantras of China's economic recovery plans has been the desire to boost domestic consumption, thus reducing China's dependence on exports and its vulnerability to shifting commodity prices and international consumer markets. Two examples of China's recovery being touted by Beijing are the rise in rural consumption and the revival of residential real estate sales. But these may not necessarily be indicators of a sustainable shift in Chinese consumption patterns. Even before the onset of the global economic crisis in the second half of 2008, Chinese economists, academics and government officials were calling for an increase in domestic consumption, after seeing the role of domestic spending decline steadily as a percentage of gross domestic product (GDP). China's booming export sector and the country's ability to attract foreign direct investment (FDI) fueled a rapidly rising GDP, but exports and FDI also contributed to a widening disparity between urban and rural Chinese, between the coastal provinces feeding the export markets and the interior provinces supplying labor to the coast. In addition to the widening wealth gap (and the attendant concerns of social unrest triggered by the disparity), Beijing also worried about the impact of volatile commodity prices and the uncertainty of export markets in sustaining Chinese economic growth. Both potential problems became realities in 2008 as commodity prices soared, followed by the near collapse of the export markets in Japan, Europe and the United States. As part of its response, Beijing once again emphasized the need to stimulate domestic consumption, calling on banks to loosen credit while the central, regional and local governments offered incentives to spur consumption. And the actions appear to be paying off, at least according to the statistics. Chinese officials and media touted 14.7 percent retail sales growth in March, which bumped upward slightly to 14.8 percent mark in April. The National Bureau of Statistics of China noted that April saw rural spending rise 16.7 percent, outpacing an urban spending rise of 13.9 percent. Further adding to the apparently positive figures was the uptick in real estate prices, which climbed 0.4 percent in April in the 70 largest cities, rising from the 0.2 percent growth seen in March. Real estate investment rose 6.8 percent in the first five months of 2009, with the fastest growth rate seen in central China, though the east saw by far the most volume. Commercial sales volume rose 45.3 percent over the same period. Chinese media have begun to discuss the recovery of the real estate sector in China as another sign of national recovery based on domestic activity, and anecdotal reports from Hong Kong confirm that real estate investment firms are hot once again. But the two prominent symbols of Chinese recovery are somewhat misleading. Much of the growth in rural consumption, for example, was due to a government rebate program to encourage the purchase of some 15 billion yuan ($2.2 billion) in household appliances. This soaked up some of the domestic oversupply of appliances and contributed to consumption numbers, but it is not exactly a sustainable policy — there are only so many refrigerators a person can buy. Government tax rebates and stimulus money also contributed to the rise in small-car sales and purchases of agricultural equipment. Again, these are durable goods, bought largely with government incentive monies, and such activity may be more a one-off gain than a repeatable example of energized domestic consumption. The real estate numbers may also be misleading. Rather than signaling a resumption of economic activity, or portending a follow-on spending surge on household furnishings, published and anecdotal reports suggest that real estate investment, particularly residential real estate, is often seen as a long-term investment to secure money — like buying gold — rather than as something to use or even re-sell or rent. The revival of the real estate markets, rather than a sign of recovery and confidence in the Chinese economy, may instead represent the search for a savings safe haven that is better than banks with their the minimal interest and the unreliable stock market. Also, the secondary housing market remains small in comparison, dampened by the surge in real estate investment, which is causing more new units to be built. As long as investors do not need to access their money, they can keep it tied up in real estate. Technically, it retains its value, sitting as a concrete asset for years until its time to sell in order to provide something similar to retirement income. Unlike gold, however, real estate cannot be dumped quickly in times of sudden personal crisis, particularly when the secondary market remains underdeveloped (and potential buyers are going after new real estate). While China's current policies appear to be softening social tensions over an economic slowdown, they do not appear to be bringing about substantial changes to the economic system that left China so vulnerable to external factors in the first place.