Raiding the Piggy Bank

ILLUSTRATION FOR TIME BY THOMAS FUCHS

If you believe some U.S. officials, the Chinese people are way too thrifty. Hoping to help bring down the soaring U.S. trade deficit with China, which rose by 15% to $232.5 billion last year, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have urged Beijing to encourage Chinese consumers to spend more (preferably on U.S. imports) and save less. It's true that a culture of financial prudence has shaped the psyche of generations of Chinese, leading to a national savings account of $2 trillion at the end of 2006. But it isn't quite fair to suggest that overly frugal Chinese consumers are largely responsible for trade deficits. Households only account for half of China's total savings. High levels of government and business savings also contribute. China's central bank, for example, holds more than $1 trillion in foreign currencies and securities. Moreover, the widely held view of China as a nation of supersavers appears to be increasingly out of touch with reality—a shift that has dramatic implications for the global economy.

HSBC recently conducted a survey on saving and spending patterns among the middle class in six Asian cities: Hong Kong, Kuala Lumpur, Shanghai, Seoul, Taipei and Tokyo. Surprisingly, it was Shanghai's middle class that stood out as having the highest propensity to spend. Nearly three out of four Shanghainese who answered the survey said they agreed with the statement that "people nowadays will choose a balanced spending and saving mode rather than sacrificing to save." Of this group, 47% said they saved only what was left at the end of the month; almost one out of three said they did not save at all. These results suggest that scrimping and delayed gratification are becoming outmoded traits of an older generation. China's burgeoning middle class is hungry to enjoy the fruits of its labor today, especially in the most prosperous mainland cities, where disposable incomes rose around 12% last year.

By some estimates, there are already as many as 100 million members of China's middle class, defined as people with monthly incomes of over $650. Their ranks are projected to triple in a decade, with middle-class lifestyles spreading beyond the big coastal cities such as Shanghai, Beijing and Guangzhou to smaller ones such as Xiamen and Wuxi. Across China, spending is already surging, with retail sales rising by 13.7% last year and 12.9% in 2005. Spending patterns are changing, too. Consumer demand is expanding to service industries as Chinese splash out on travel, sports and entertainment. According to HSBC research, middle-class Chinese consumers now dine out three times a week, belong to fitness clubs and travel for pleasure at least twice a year, albeit mostly within China. Mobile phones and personal computers have become common in this land of former hand-to-mouth farmers. That's providing abundant opportunities for companies looking to ride the spending wave. The emerging Chinese middle class has become an important target market for international businesses keen to supply it with products and services.

This is not to say that mainlanders are as profligate as, for example, middle-class Americans, whose savings rate is zero. The survey shows that they are value-conscious. Although they are exposed to new trends in high-fashion consumption through the media, many middle-class Chinese still regard "luxury" as a synonym for "unnecessary waste." They tend to buy luxury items such as watches and jewelry sparingly and only when shopping outside the mainland.

It's often assumed that Chinese feel obliged to set aside large chunks of their income because the government no longer provides cradle-to-grave benefits as it did under a purely communist system. But China's urbanites are not just stashing away money to fund retirement and meet rising medical costs. Many Shanghainese respondents to the HSBC survey said their two main motivations for saving were to buy real estate (the majority already own at least one property) and pay for their kids' education. Travel was listed as the third most important reason to save. Only 14% of respondents said they were saving for retirement.

Clearly, this is not a picture of a population obsessed with dire financial scenarios. In coming years, this shift to a culture of consumption can be counted on to boost Chinese imports, contributing to more balanced global trade and putting Messrs. Paulson and Bernanke more at ease. Meanwhile, the aspirations of Chinese to improve their living standards, seek better education for their children, invest their growing wealth in new ways and savor a more worldly lifestyle will present huge opportunities for companies nimble enough to take advantage of this profound cultural change.