In the U.S. and elsewhere there have been many discussions about what the increasingly powerful Chinese economy can and will soon do to exert an influence on economic matters. Many economists have weighed in on the heavyweight impact China will soon make as a consumptive economy.
Since the Chinese are back on track as having a relatively high growth rate, it might seem sensible to believe that Chinese-based consumption will soon be able to provide a substitute demand for any economic slowdown in the West.
However, that is simply not the case. Here’s a historical perspective of why: In the early 1900s, Americans were strikingly similar: big on saving, not consuming. “Prudence” was the byword of the day. As the century unfolded, the U.S. industrial revolution kept expanding such that excess production became a problem. Even with falling prices, people were unconvinced they should buy anything on credit, nor was there a credit market established.
A look back at socio-economic history shows the Great Depression was created because Americans were unwilling to increase their level of consumption, rather than continuing on their saving ways. A disequilibrium was created as a result.
From the turn of the 20th century it took on the order of 45 years to teach our citizens to become spenders, rather than savers. Part of this was the time it took to change the average mindset, through conversations, movies, plays and more. Also needed was the development and implementation of easy ways to entice them: credit cards, “no money down, and no payments until,” and much more.
Currently, the Chinese savings rate is a whopping 40-50% of individual and family GNP. With such a high predilection for saving, it will not be an overnight process to develop a high consumption domestic market in China. For that to occur, a large number of social taboos and current practices will need to be overcome. That will all take many years.
Even with electronic exchange and the Western idea of buying on credit already established as concepts, you can count on any such transition taking at least a decade or so. Don’t count on the Chinese becoming big time consumers any time soon.