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Will the Crash Kill China’s Consumer Economy?

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China is in the wreckage of a historic stock market crash. The government is stabilizing the victims with drastic measures. Who knows if the cure will be worse long term than the disease?

Not us. Nor do we know of any famous media oracles who are faultless in their predictions.

What we seek to understand, though, is not how this crash will affect traders, but rather China’s consumer economy, and by extension the western businesses looking to create value in it.

To do so, we’ve turned to four experts: Jack Duan, whose mission is bringing quality products to China online; Kelland Willis, a noted China researcher in the retail sector; Richard Zhang, a former Morgan Stanley analyst, now a China financial planner, and Dr. Wang Fang, VP of cross border site WGWG.com.

 Gliding Eagle's Jack DuanJack Duan, Gliding Eagle

 “This is a temporary reality check. China’s consumer spending is still only at about 35% of the total GDP, with a government mandate to grow, while developed countries are closer to 50 and 60% of overall GDP.

 The long term trend is continued increase in consumer spending, as long as jobs and GDP continue to grow. The Chinese will pay a premium for a healthy lifestyle, which is associated with foreign products, especially food related.”

 Grin Advisory board member Kelland WillisKelland Willis, GRIN Advisory Board Member

 “While it may seem counterintuitive, China’s stock market crash is unlikely to have a major effect on its consumer market. 

Retail is affected as a result of a stock market crash because people don’t have money to spend. However, Chinese consumers save, and they keep the vast majority of their investments liquid. The average household in China saves 30% of their disposable income – meaning they have savings even after they lose all of their investments.

Additionally, they have the cash flow to be patient enough to wait for the market to come back around and keep their day to day life normal in the meantime. By comparison, the US household average savings rate is 5% (of disposable income) so when they lose all of their investment money to the stock market, there is a scramble to save and retail flops.”

 financial planner Rick ZhangRichard Zhang, Financial Planner (former Morgan Stanley analyst)

 “A representative anecdote: in mid-June, when the Chinese stock market reached its peak, Mr. Siu, a 25-year-old sales person at a renowned financial/economic media group in Shenzhen (south China’s most developed city), was planning a two week trip to the U.S. with his mother, including first class flights, a stay at the St. Regis in Manhattan, fine dining at award-winning restaurant Deuxave, luxury shopping at Saks 5th Avenue, blackjack in Las Vegas…

 Siu had begun investing in China A-share stocks in early March, and saw his portfolio’s worth soar 100% in just three months. Now, despite the big rally manipulated by the Chinese government, he has lost most of his principal. He’s switched his travel plans to a day trip to Dameisha, a local beach in Shenzhen.”

 Screen Shot 2015-07-15 at 9.40.27 amDr. Wang Fang, WGWG.com

 The Chinese government depends more than most foreigners understand on the confidence of the people. So the government will fight back against this downturn using any means possible. I’m confident they can find a way, although it’s going to be ugly.

 That’s the mystery of the Chinese economy. We all hear the negative news, but we don’t see any slowdown in China’s consumer economy. I was in the UK for the sub-prime crash of ’07, and witnessed the panic. I don’t see any sign of the same effect on Chinese consumers right now, and I don’t expect to. The government will find a way to keep the consumer economy growing, although there may be slight slowing in the short term.”

 (Dr. Fang gave his comments before the China stock market rally last Thursday.)

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