Zen And The Art Of Chinese Economic Re-Balancing

The latest news out of China is were up 11% according to the Ministry of Commerce. That figure seems to overstate domestic spending during the period, but in any event purchases by the country’s tourists abroad evidently increased by a higher percentage. A shift in spending patterns suggests Chinese-made goods are losing favor with China’s increasingly demanding consumers.

The real reason for the Chinese consumer to be buying abroad is the perceived quality of foreign made goods (emphasis added):

Why would the Chinese go all the way to Japan to purchase something they could get at home? There appear to be two reasons. First, it was reported that the Chinese goods were cheaper in Japan than in China. But price was not the primary consideration. Second, I think the Chinese believed that Japanese retailers, unlike their Chinese counterparts, would carry only high-standard items.

China’s people, who can often afford the best, are demanding better goods. As the influential Beijing Youth Daily noted, “Chinese enterprises are focused more on producing low-priced products, but they missed the point that more and more Chinese consumers are starting to care more about quality, rather than price.”

Despite years of experience, Chinese manufacturing is not moving up the quality chain as fast as expected. As a result, “overseas trips are turning into regular shopping trips for household items” the South China Morning Post reports.

There have been far too many scandals over the quality of domestic products in China:

Many of China’s producers are apparently unable to bridge the quality-perception gap. Take an item that top Chinese leaders have repeatedly promised to improve: milk powder.

Last month, there were violent protests in Hong Kong as local people there tried to stop “parallel traders” who were emptying shelves of milk and other items. The busy traders often make multiple trips a day to carry goods into Mainland China. Sometimes parents themselves make the trip.

Why is foreign milk powder so valuable in China? Chinese powder is often poisonous and sometimes lethal. About 300,000 Chinese children suffered kidney damage in 2008 because local producers were adding melamine, an industrial chemical, to milk. At least six infants died. Since then, there have been isolated scandals involving milk and many incidents involving other adulterated foods.

In summary, this is the story of how China is re-balancing and not re-balancing its economy. Consumption is re-balancing, but it may not necessarily be to the benefit of domestic suppliers. Chinese manufacturers need to start to develop the right corporate culture and learn to move up the value chain to focus on quality instead of just price. Until that happens, much of the benefits of re-balancing growth towards the Chinese household sector is likely to accrue to foreign firms.

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Written By: Cam Hui