In 1949, Mao Zedong came to power and declared the formation of People’s Republic of China. Under his leadership, Mao’s Communist government largely emphasized socialist ideology where the economy was to be commanded by the state. Chinese citizens were expected to direct their energies toward the good of the state; personal pursuits or ambitions were highly discouraged and were to become extinct in the socialist context.

    The popularity of the “Mao suit” provides an illustration of the prevailing conformist mentality of that era. The Mao suit consisted of a jacket and matching trousers of heavy, dark blue cotton; it was worn constantly by Mao Zedong, functioning almost as a uniform. Both men and women were increasingly required to wear Mao suits as other outfits came to be associated with a suspect individualism—a signal that suggested deviation from the communal society’s values and practices.

    When Mao came to power, China was a largely agrarian and desperately poor country. Under his political ideology, he attempted to speed up the socialization of China through a rigidly planned economy. His agenda called for turning industry and agriculture over to the state, and by the end of the 1970s, this had been accomplished: the private sector represented less than 1% of the entire Chinese economy. But while this structure may have been good socialist policy, it was an economic disaster. The average per capita income was less than $300*, and according to the World Bank, 50% of Chinese citizens were living below the poverty line.

THE DOOR OPENS
With the rise of Mao’s successor, Deng Xiao Ping, China’s future started to head in a different direction. In 1978, Deng began implementing a series of “Open Door” reforms that reversed Mao’s failed development strategies. His famous statement that “To grow rich is glorious” marked the turning point to a new era, but his pronouncement “Let some people get rich first” exemplified the attitudinal shift that launched China’s attempt to achieve economic prosperity. This new notion enabled the creation of the “Special Economic Zones” (SEZs), and stood in stark contrast to the Maoist ethos of strict egalitarianism.

    SEZs were initially located in four coastal cities and the province of Hainan; by 1984, an additional 14 cities were selected as SEZs. The SEZs were intended to attract foreign investment and speed the pace of modernization, and the experiment was a success. In Shenzhen, for example, the number of foreign electronics manufacturers grew from one to 60 in just five years, and the number of people employed in the city’s electronics industry increased by 50 times from 1978 to 1983. The value of that industry’s output surged from $320 million to $160 billion during the same time period, and a similar pattern was repeated across other manufacturing businesses in various SEZs. Finally, the “Open Door” let a breeze blow through the once stifled Chinese economy. And sure enough, some people did “get rich first” thanks to this partial experiment with economic liberalization.

Source: Goldman Sachs, World Bank

RISING INCOMES IN BIG CITIES
With increasing job opportunities in the SEZs and a gradual relaxation of employment restrictions, some of China’s labor force began migrating out of agriculture and into higher-wage factory jobs. Between 1983 and 2000, the value of China’s exports increased from $22 billion to $249 billion, and the per capita GDP nearly tripled. By the turn of the century, the percentage of China’s population living below the poverty line had dropped to 16%. As the chart below shows, some Chinese citizens were earning not only enough to survive, but also enough to think about spending just a little bit for pleasure and comfort. Between 1978 and 2004, sales of consumer goods grew by an average of almost 15% per year—more than double their growth-rate of the previous two decades.

    This growth contrasts with the situation in the preceding 20 years when the Chinese people couldn’t think beyond consuming basic necessities for survival. Although the Chinese government provided all housing and medical care under the socialist system, the stagnant economy left little fat in the household budget. During that time roughly two-thirds of Chinese household spending went toward food, and consumer goods which were both in short supply. For the most part, the average Chinese citizen simply couldn’t afford to purchase these basic necessities.

    The reforms undoubtedly brought happier times to many in China, but the opposite held true for rural dwellers, who saw little economic benefits heading their way since China’s door was opened. By 1985, the average income in Shenzhen, for example, was close to $1,500, compared with less than $130 in the inland city of Guizhou. The discrepancy only widened over the following years as income growth in the urban areas continued to outstrip rural areas’. This urban/rural income disparity remains a major concern of the government today.

A PENNY SAVED...
For many Chinese citizens, reforms and rising income didn’t immediately translate into increased financial security. In both rural and urban areas, savings rates crept up from perhaps 14%-15% of annual income in the 1990s to some 25% in 2004. Much of this increase was driven by concerns about the future. In the new, reformist era, job security and medical care have ceased to be guaranteed, and China lacks any comprehensive program to provide for retirees. With the government trying to reduce the amount it spends on education, college-tuition fees rose by 1,000% between 1990 and 2004. Consumer spending requires a sense of security about the future, and while China’s relative political and economic stability may have eased some concerns, for many Chinese citizens, old worries have simply been replaced with new ones. Therefore, higher levels of saving was perceived as a more prudent use for their newfound wealth.

A NEW CONSUMER CULTURE
But even as the savings accounts have grown, so has the government’s openness toward discretionary consumption. Under Mao’s leadership, consumerism was suppressed; enforcing a collective national identity was the government’s top priority. By contrast, the current Chinese government is actively promoting domestic consumption. An example of this shift was evident when in 1999 the government introduced the “Golden Week” holiday scheme. The nationwide holidays were intended to prompt affluent citizens to take short vacations and trips in their own country; China now has three such “Golden Weeks” each year. Between 1994 and 2004, revenues from domestic tourism more than quadrupled, and as of year-end 2003 there were roughly 12,000 travel agencies in China catering to the local population.

    Another important contribution to a larger appetite for consumption was the housing reforms in the mid-90s. The government began phasing out its system of providing free housing, opting instead to grant low-interest housing loans and permit banks to write mortgages. Since 1997 the mortgage market has grown by an average of 109% per year, with sales of household appliances surging in response. More importantly, home-ownership brought a sense of security and permanence to many families, which was stifled during the pre-reform era. Chinese people can now finally seek a better quality of life and explore options for themselves. Consumers faced limited choices when shopping for food, clothing and household appliances, now these goods are increasingly being purchased from organized chain retailers. By the end of 2004, the ten largest retailers in China (both home-grown and foreign) had a total of 9,712 stores in operation and were growing three times more quickly than the country’s total retail sales.

THE CURRENT STATE OF AFFAIRS
The new generation of Chinese, unlike their parents, has less history of venerating conformity and financial sacrifice. Their concept of consumption differs from their parents’, in part because they have many more choices. Where once the Mao suit held sway, China now boasts manifold homegrown brands of clothing pitched to average local buyers, as well as international fashion for elite shoppers. Where once state-owned restaurants were the only alternative to eating at home, American fast-food chains now have nearly 3,000 outlets across China. And despite the high cost of education, China’s 4,500 universities and technical colleges will churn out 3 million graduates in 2005, which might make the earning power of these young Chinese higher than their parents’.

    China has changed a great deal since the days of the Mao suit; but the newfound taste for consumption is not yet an established feature of Chinese culture. China’s economic growth has given rise to many structural and social problems, not the least of which is that the economy remains unbalanced: domestic growth is still largely dependent on investments in capital infrastructure, not consumer spending. Consumption accounts for less than 45% of China’s GDP, versus two-thirds of the U.S. economy. Furthermore, the country’s weak banking system prompts citizens to save to excess, as individuals fear that the only way to mitigate problems in the country’s financial system is to accumulate a large nest egg. With saving rates growing at twice the rate of GDP during the past five years, Chinese citizens have yet to demonstrate strong confidence about their future prosperity. Adding to this problem is the growing income gap between city-dwellers and rural residents. Historically, when this gap has grown too great, it has given rise to social tensions that have spilled over into political instability, which in turn could shock demand growth. All these are problems that can reverse the new trend toward higher consumption and better standards of living. In the end, China still has a long way to go and much work to do before it can foster stable and sustainable domestic consumption—an indispensable element of a balanced economy.

Sources: McKenny, Karen I., “An Assessment of China’s Special Economic Zones” (The Industrial College of the Armed Forces. National Defense University, Fort McNair, Washington, D.C, 1993); Ogus, Simon, “The Rise of Consumerism in China” (DSGAsia Limited 2004); World Bank, CEIC, HSBC, China’s National Bureau of Statistics.
*All dollar figures are in U.S. dollars with exchange rates calculated as of year-end 2004.