Huffpost Business
THE BLOG

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Tom Doctoroff Headshot

China in 2013: The Confidence Game

Posted: Updated:
Print
AP
AP

The topography of China's commercial landscape remains consistent from year to year. The PRC is characterized by:

A) A digital universe that pulls an self-expressive yet repressed new generation into its grip. The popularity of new group chat sites such as Tencent's Weixin are a testament to the new generations intoxication with digital self-expression and connectivity;

B) Exploding e-commerce that promises to rebalance the power equation between bricks and mortars retailers and the buying public, particularly in lower-tier cities;

C) Luxury and auto brands that command high price premiums and enjoy consistently high year-on-year growth because they are "tools" of success on the battlefield of life;

D) Stratospheric media rates driven by a monopolistic (i.e., state controlled) sellers' market,

E) Steady urbanization the introduces tens of millions new urbanites to consumerism every year, and propels momentum of brands in lower-tier cities;

f) A preternaturally value-conscious public that gives new dimension to the term "smart shopper."

Each one of these trends will remain in tact during 2013. The country's spending locomotive will not derail -- the underlying growth paradigm has not yet expired -- but the road ahead will be bumpier.

Reform: No Longer a Luxury

Every educated Chinese realizes the nation's growth model requires determined, albeit gradual, reinvention. Given increasing labor costs, the engine of economic advancement must shift from exports and capital investment, the latter channeled mostly to oligopolistic state-owned enterprises, towards consumer spending and services.

The biggest unknown remains consumer confidence. (If soft, media inflation rates will remain "only" in the high single-digits.)

The $64,000 question: Will the fifth generation of leadership led by President Xi Jinping and Prime Minister Li Keqiang, signal China remains future-focused? Through force of vision and personality, will they make moves to manage intra-Party conflicts of interest that, to date, have precluded meaningful political and economic reform?

From birth, the Chinese are conditioned to have "patriarchic faith" in their leaders' intention to orchestrate top-down, incremental reform. The Chinese are expert readers of tea leaves. Deng Xiaoping's famous 1992 tour to Guangdong province was rightly interpreted as a harbinger of economic liberalization. His proclamation, "To get rich is glorious!" unleashed a flood of foreign and domestic investment. After three years of post-Tiananmen deep freeze, the Chinese emerged from a collective perch, and decided it was safe to go in back into the water. Deng imperially mandated that generation of capital was tantamount to "success" and the result was twenty years of transformative growth.

But faith in the technocratic mastery of central government apparatchiks is not absolute.

Today, confidence has eroded.

China's Fifth Generation: Early Signs

Hu Jintao was considered out of touch with contemporary economic realities. The outgoing president's facial features had congealed into a Sphinx-like mask, reinforcing the perception of an ossified power structure, hence the rush for foreign passports amongst China's wealthiest businessmen.

2012 was a year in which the party's failure to inspire was particularly pronounced. During the lead up to a once-a-decade leadership transition, the show trials of Chongqing supremo Bo Xilai's wife, Gu Kailai, and whistle-blower Wang Lijun harkened back to Cultural Revolution theatrics. The purge of Bo Xilai himself, perhaps justifiable given his narcissistic power hunger, was both ham-handed and extralegal. The shadowy accumulation of assets by leaders and their families, reported in the international press and spread across the country by angry micro-bloggers, reinforced perceptions that corruption trumps meritocracy in 21st century China. Many fear the CCP's consensus-driven modus operandi, not to mention relentless protection of factional self-interest, precludes bold experimentation.

Many now ask whether the contradictions of society -- between rich and poor, urban and rural, young and old, politically connected and "small potatoes" -- are approaching the breaking point. While crisis is not imminent, loss of absolute confidence in the future of the country has manifested itself in many ways, from 200,000 local protests to a slowdown in sales of luxury goods, real estate and autos. According to C-trip, bookings mid-level travel destinations such as Hainan island, usually popular amongst the new middle class, are down dramatically. Job-hopping, perhaps the greatest indicator of economic optimism amongst ambitious Chinese, has slowed, a sign of diffused anxiety.

All eyes are now on Xi Jinping, China's new president.

Initial reaction to Mr. Xi has been cautiously optimistic. His "launch speech" on corruption was strongly worded, refreshingly free from kabuki formalism and Party sloganeering. In December, China's new top leadership called for a reduction in the pomp and ceremony involved in official events -- fewer motorcades and welcoming ceremonies, and shorter speeches -- and also instructed state media to spend less time reporting on the activities of officials and more on real social issues. Most significantly, Xi Jinping's first presidential trip, following Deng Xiaoping's footsteps, was to Shenzhen, China's most entrepreneurially dynamic city. The excursion has, rightly, been taken as a signal of robust reformist intent.

However, until Mr. Xi outlines specific, incremental steps of structural reform -- intra-party checks and balances, independent commercial courts, urban residency reform, rural land-ownership reform, further strengthening of the welfare net and other institutional mechanism to safeguard the economic interests of individuals -- consumer confidence will wane. If so, "rebalancing" will remain a long way off, and the China's potential under-realized. China will certainly not flirt with Western-style democracy or laissez-faire capitalism. But the Chinese, supreme pragmatists that value stability above all else, know the status quo is unsustainable.

Spending and Uncertainty

Even during the best of times, middle class Chinese are torn between "projective" and "protective" impulses. Relative to other markets, even in Asia, PRC shoppers are will shell out big bucks for any product that generates face, the currency of forward advancement. From a cup of Starbucks coffee to a new car (usually purchased for more than 100 percent of yearly income, and often involving contributions of extended family members), status is an investment in the future. On the other hand, goods consumed in the home -- for example, appliances or home furnishing -- and other non-essential items are extremely price sensitive.

This dichotomy results in stratospheric savings rates, in excess of 35 percent of GDP.

During periods of uncertainty, the pull between projection and protection becomes even more pronounced. Mid-tier brands, ones neither particularly cheap nor status generators, struggle. So do "lower-end luxury" items. If consumer confidence continues to drop, value consciousness will be even more acute and pennies will further be pinched. Retailers such as Levis and the Gap, priced between cheap local labels and more premium brands, will face challenges. So will out-of-home restaurants such as Pizza Hut. The real estate market will also continue to stagnate.

During the 2008-9 financial crisis, spending froze -- auto sales flat lined, the real estate market ground to a halt -- until massive government-mandated investment sent signals of reassuring determination to maintain heady growth. Public confidence in its government's ability to navigate dangerous shoals remained steady, despite the sudden loss of 20 million factory jobs, mostly held by migrant workers.

The public is hoping for a blueprint of far-sighted reform. For the sake of continued economic dynamism, not to mention geo-political harmony, let's hope the government responds in kind.