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The key question is, How big can the middle class grow? If there are two Americas, there are about four different Chinas, from millionaires to the desperately poor. In the coastal cities, the average annual income can be $5,000 or more, but in the rural areas, it drops to a few hundred dollars a year. China has a huge wealth divide its Gini coefficient, the measure of how much inequality there is in a society, is one of the largest and fastest-growing in the world. That divide has created increasing political risk in China. Many notable investors, like hedge-fund manager Jim Chanos, see China as one enormous bubble, ready to explode. According to him, all the speculative capital in the country makes it look like "Dubai times 1,000."
But if the Communist Party can successfully navigate the risky rebalancing road laid out in its new five-year plan, millions of nonfarm workers will soon get what American workers haven't had in a decade: a raise. A really big one. The government is targeting minimum-wage increases of 13% to 15% over the next five years, essentially doubling the income of many citizens.
And the government expects the world's largest workforce to spend it. When economic reforms began in China in the early 1980s, consumer spending was more than 50% of GDP. By 2009, consumer spending had dropped to 36% of GDP even though wages were rising. That's because the government was doing even more spending itself, pouring cash into export industries and expanding the infrastructure to move people and products around a vast geography.
All that investment sowed the seeds for what Western companies hope will be the greatest generation of spenders ever known the group of Chinese known as the Post-'80s Generation. Now in their 20s and 30s, they came of age as China shifted from a command economy to a more market-focused one, open to Western products and lifestyles. These younger Chinese have known nothing but nonstop growth, and they are much less likely to save than their more hardscrabble parents and grandparents, who typically put away 35% to 40% of what they earned. "They don't deposit that much money," says Victor Yuan, chairman of the Beijing-based Horizon Research Consultancy Group. "Their bank-savings rate is much lower, and it is much easier for them to spend money."
Can they really spend enough to bail out the global economy? U.S. consumer spending is about 70% of the nation's $15 trillion GDP, which is what helped get America into trouble. As for China, the numbers behind any big shift toward consumerism there are potentially world altering. China's 2011 GDP is roughly $6 trillion. If consumer spending goes up from the current 36% to reach 45% of GDP the government's stated goal $540 billion in spending would flow into consumer goods and services. That amount of spending would be enough to lift the U.S.'s GDP by 3.6%, which is a boom. And that doesn't even factor in China's economic growth. If the economy expands 9% annually, as it has in recent years, and half that growth goes toward consumer spending, you quickly get to $500 billion in additional spending in two years, using current numbers as a guide. That's the most bullish scenario, to be sure. But if you are a global corporation, you definitely don't want to miss out on a piece of that potential stimulus package.
The Reverse Marco Polo