Chinese businesspeople like Mr. Tseng are adapting to what they believe will be a lasting consequence of America's deep recession. Savings by suddenly frugal U.S. households soared to an annualized $566 billion in the second quarter, more than quadruple the rate at the start of 2008. While that is important to rebuilding U.S. financial health, it is also sucking demand out of the world economy. China's exports, after growing for years at a steady 20%-plus rate, recorded a year-over-year drop last November. They kept falling, and in August were down 23% from a year earlier.
Spending by Chinese consumers, meanwhile, is holding up pretty well, partly because of heavy stimulus spending by a government flush with cash. Urban household spending in China was up 9.2% in the first half of 2009, not far off the country's average overall growth in recent years.
This shifting dynamic shows how the global economic turmoil is pushing China, the world's second-largest exporter after Germany, to become a more inward-focused economy. Even once world growth gets back on track, China is likely to run into limits on how much more it can expand its export market share, economists say. The World Bank expects that slower export gains in the future will shave about two percentage points off China's historical growth rate of 10%.
With the recession, Chinese exporters have been taught the dangers of a narrow business model. "The lesson we learned from the financial crisis is not to put all your eggs in one basket. We relied too much on the U.S. market," says Mr. Tseng, a 42-year-old native of Taiwan. "If we had started domestic sales earlier, our business wouldn't have declined so much this year."
Chinese domestic demand isn't a panacea for exporters. For one thing, domestic demand itself can suffer to some extent when exports decline, because the jobs of so many Chinese are linked to export industries. In addition, China's consumers simply don't have the money to drive the global economy in the same way as big-spending New Yorkers and Parisians.
This had been a wild card in the recovery game -- China becoming a demand center for consumer goods. The logic is simple: the country has experienced on of the largest growth spurts of any economy in some time. Some of that money has translated into higher living standards and an incredibly high savings rate. But as people see their incomes increase, they want more things. This is called the wealth effect and its a natural by-product of a growing economy.
There is no formula for how much of the growth will translate into increased consumer spending. That makes this idea a wild card for the next world expansion. But don't be surprised to the Chinese consumer taking on a larger role as the world economy recovers.
