Spend and pretend
China has no more potent symbol of consumer power than “Singles’ Day”. Alibaba, the e-commerce giant that invented the shopping frenzy which takes place every Nov. 11, shifted $2 billion of goods on its websites in the first hour of trading. If consumers kept that up all year, retail sales in the People Republic would be five times bigger than they actually were in 2013. Fortunately, they don’t.
Consumption has replaced investment as the guiding star of China’s economic policy. Years of wasteful investment has created eyesores and a mountain of debt. Economists cheered when consumption rose to 48.5 percent of GDP in the first nine months of 2014, from 45.9 percent a year earlier. Top leaders have praised Alibaba for helping Chinese citizens find their inner spendthrifts.
There’s something to that, since consumption is less volatile than exports or government-mandated investment. People can choose where and when to spend their money. But consumer spending is a poor target, because like investment, it comes in both useful and wasteful forms. Money spent on education or healthcare improves the quality of people’s lives more than a pair of discounted Ugg boots, or a Big Mac.
Consumer spending can even worsen bad outcomes like economic degradation. Anyone who has tasted Beijing’s air would question the logic that a household buying a car, which counts as consumption, is better than a power plant installing an air filter, which would be classified as investment.
Politicians like consumption because it makes the masses feel good. But those benefits can diminish over time. China’s boom in sales of luxury goods owed much to gift-giving to corrupt officials – a kind of feel-good factor the country’s leaders no longer want to encourage. Although retail sales are growing rapidly, a quarterly central bank index of people’s feelings about future income has steadily declined over the past five years.
This doesn’t matter to investors in Alibaba. “Singles’ Day” alone contributed 2 percent of the company’s entire merchandising value in 2013. And only a real party-pooper would begrudge Chinese consumers their yearly spending frenzy. But while China’s future undoubtedly lies with its consumers, the cult of consumption can do as much harm as good.