By Mario Cavolo
Chinese people spend far more time than the citizens of most countries focused on the simple reality of making and accumulating money, while very much being future minded in doing so. What is driving the shift in priorities?
A version of this article, written by China author Mario Cavolo, was originally published in the May 2014 issue of Shanghai Business Review magazine. Over two years later we find, as expected by the author, a continued strong trend in domestic household consumption and retail sales through 2016. This well serves us all as a reminder that while China’s economy has myriad challenges, a shortage of cash in consumer households is surely not one of them.
Most discussion regarding China’s shadow economy fall into the categories of 1. The shadow banking system and 2. The amount of cash in the hands of the wealthy. Let us examine those sectors briefly while then examining more closely a third factor, what one might regard as far more significant; the rising lower and middle classes who, in fact hold trillions in off the books cash. In considering such a scenario, we are forced to ask two key questions: Is it true? And, how and why does it matter?
Let’s begin with a comparison. According to the world’s top shadow economy researcher and University of Wisconsin Professor Edgar Feige, the United States’ off the books cash economy hovers around $2 trillion. And by “off the books” we mean legitimate products and services paid for in cash and not reported, such as paying a local handyman $60 to fix your faucet problem or a local accountant $100 to help with your finances. Let us also note that the US official GDP to shadow economy ratio is $16 trillion to $2 trillion, or 8:1.
China on the other hand has a far more extreme ratio – a shadow economy to total GDP ratio of at least 0.6:1 to as high as 1:1. Yes, that means I am suggesting China’s official GDP at $11 trillion gives us an additional off the books cash economy of $6 to $11 trillion. Shocking, staggering, yet quite believable when one takes the time to dig deeper, which of course is the subject of the book, China: The Truth of Trillions In A Culture of Cash. In either case, we find ourselves suddenly realising we are noticing something which is indeed invisible, yet very important to notice and examine. Credit Suisse’s report along with Professor Wang Xiao Lu of the China Reform Foundation pegged China’s shadow economy at least $6 trillion (nobody will ever really know), with household incomes 2-3x higher than officially reported. One might ask, for example whether after dining on a plastic chair at one of the millions of China’s ubiquitous local street side vendors recently, they were given a fapiao receipt. Of course not; there goes another transaction completely off the books and outside of GDP.
Capturing the Chinese Consumer’s Cash
Such a scenario begs the question; how much money do the lower/middle class people of China who for the most part look rather plain, certainly not up and coming in the traditional sense, really have? What are they doing with it and how can my business capture a larger share of it?
In exploring the size of China’s off the books cash economy, I did some calculations indicating the amount is more likely to be $10 trillion rather than $6 trillion. Skipping an exploration of the $4 trillion difference, what we do know is that much of that cash is the original resource cash of China’s shadow banking system, which represents about 15% of China’s total banking system liabilities, according to China-based investment research firm CLSA. We can further identify that there are trillions in cash held in the hands of China’s billionaires and millionaires.
However, what we are concerned with here is the implication of $6 to $10 trillion quietly sitting in the bank accounts, mattresses and home safes found in China’s lower and middle income class households. For one, it helps explain the strength in China’s domestic retail economy, still growing at a blistering 12% pace (still 10% as of 2016) along with the sale of over 20 million middle class priced cars annually, the majority of which were paid for in cash.
The conclusion I come to over the course of this journey is two fold: Chinese people spend far more time than the citizens of most countries focused on the simple reality of making and accumulating money, while very much being future minded in doing so. A look at the pension system and underlying traditional values of family in Chinese society help us to realise that such money is being quietly, diligently accumulated for retirement and as inheritance to their children and grandchildren, supporting a better life and education for the next generation. What is driving the shift in priorities?
Why Will The Chinese Consumer Part With Their Cash?
The converse of such observations might be to realise that such a person would be quite difficult to convince to part with their quietly, hard earned cash. One example might help us to realise just how much cash we are referring to. While most of us rationalise that a street vendor probably earns around $1,000 per month, a closer look at 40 year old Mr. Chen who sells his BBQ chicken wings nightly on a local street in Shenyang reveals that he in fact is accumulating closer to $3,000 per month in net profits, all off the books cash, while living on the typical low budget life of a local. Over ten years, one could reasonably conclude our Mr. Chen has accumulated $200,000.
As the question of whether or not Mr. Chen can actually afford it or not is now answered, one’s goal as a business with a product or service to offer should then have a singular intended outcome; Show a middle class consumer how buying your product or service is:
1. Attractive, fresh and trendy
2. Creates utility & convenience, or
3. Helps them to make even more money
We must also consider that they regard their money as multi-generational family money. You cannot say the current generation of 50-70 year olds will not part with their money. If they are shown a benefit to their children or grandchildren, we see that they will gladly chip in, e.g. For the purchase of a home in the marriage, to invest in a business, to invest in overseas education. You must give them the right, compelling reason and the sale can be made. This insight leads to our fourth and fifth question:
1. How does your product or service support and validate where there life currently is?
2. What supports where they would like their life to be in the future including their next generation to carry on?
These observations and questions help us to understand that regardless of China’s current domestic economic pressures, China’s consumers are well-maintaining the strong trend of consumer’s domestic household consumption.
This article was originally published on LinkedIn Pulse on August 7, 2016
[/ms-protect-content]
About the Author
Mario Cavolo is a veteran expat entrepreneur based in Shanghai since 2000 with a highly respected record of accomplishments and services delivered across diverse business sectors ranging from hospitality cruise lines and resorts to events and entertainment to corporate communications & media/PR services. He is a published author of two books and monthly columnist for the Hong Kong Commercial Daily. Mario’s current focus is to deliver expert services to global cruise line and luxury resort brands within the hospitality space. When in Shanghai, he runs his client practice in media/PR communications and management advisory.
