It Takes a Family … To Live in a Chinese Village

In 1998, after one of my early visits to China, I attempted to reconstruct a Shangainese family’s budget. (See: Impressions From China (II): How Can They Afford It?) Six years on, it still is difficult to reconcile Chinese consumption with official income statistics, and my recent visit to smaller towns and villages presents the same puzzle that I had faced in one of my first visits to Shanghai.

Income Statistics Don’t Mean Much

Based on official statistics, the provinces of Shanxi, Hebei and Shaanxi and Jiangsu, which I visited on my recent trip, have annual incomes per capita of somewhere between US$400 and $600. This is below average for China and compares with official figures for Beijing and Shanghai that are easily three to five times higher. However, since all these figures seem to make little sense in view of the consumption patterns observed in daily life, some observations and speculations are in order.

First of all, Chinese statistics are notoriously inaccurate and, except for high salaries, probably capture only a fraction of family incomes. Of course, this must be particularly true of rural incomes, which do not get reported since tax assessments are regional and calculated as a fixed amount of RMB per head rather than as a percentage of income. Interestingly, for example, no villager we met had heard of the Value Added Tax (VAT), although it has officially been in effect for some years.

Locally, I was told that Shijiazhuang, which administers a surrounding population of 8.6 million but has only 1.5 million living in the city itself, has a per capita income of almost US$2,000 per annum. For smaller Baoding (1.5 million “administered” of which 600,000 live in the city proper), the average annual income per capita was said to be about $1600. Xushui county, with less than 600,000 people spread over 7 townships and 304 villages, has an average annual income per capita of more than $1200, according to some locals. These figures are not much by our standards, but they are several times the officially-reported incomes quoted at the beginning of this article. And they probably still understate the truth.

Second, all families have significant savings, accumulated during times when there were few items available to spend on. These are often kept in cash at home, which may explain the surprising locks on the doors of peaceful villages where strangers seldom venture. Among other things, these accumulated savings explain how so many younger couples have been able to buy newly-built city apartments. Reportedly, a quarter of the new homeowners did not borrow at all to buy their apartments, and most of those who did put down fifty percent or more in cash. The down payments were contributed by parents and grandparents – some of whom then go on to live in the new apartments with the younger generations, while others remain in their village homes. The same goes for car purchases, which use credit even less frequently. All other purchases – even big-ticket items -- are for cash.

Third, per capita income is less relevant than family income, which comes from several sources – including contributions from family members living away from the villages.

Finally, there are great disparities between the incomes of younger big-city, white-collar workers, which have been catching up to western levels (especially for those lucky enough to work for foreign joint ventures), and those in the rest of China. However, China has 400 million city dwellers: a mere ten percent of those city dwellers, who have well above-average incomes, would add up to a population of 40 million. This is a significant middle-class market by any standard, and it is growing fast. China’s goal is to create 14 million new jobs a year. [By comparison, the entire labor force of the United Kingdom is only about 30 million.] Partly, the new jobs are needed to offset the layoffs at struggling state-owned enterprises (SOEs), where 30 million jobs reportedly have been lost in the last five years, and partly they are needed to accommodate population growth. These new jobs will be urban jobs, and whole new cities are created regularly.

Consumption Choices Go From Surprising To Stunning

But, looking to income statistics only ignores the lifestyles of Chinese families, and their spending priorities, which are very different from ours – even when they have significant discretionary income to spend.

In the small county town of Xushui, a clean and modern-looking but very simple supermarket was particularly well stocked with items for children (toys, etc.). There also were whole shelves displaying milk products, from dairy drinks to powdered milk -- which is quite new in China, where milk was rare until recently. Also available were miscellaneous household items, from umbrellas to basic table-top appliances. (Here, fruits, vegetables and meat are not bought in supermarkets but in specialized, small stores or on the local outdoor markets.)

Also abundantly displayed were shampoos and body creams. Several popular brands of shampoo were available (Head & Shoulders, Pantene). The most popular one, Rejoice, costs about $3 per bottle. Ulan, “the best body cream available in this county”, costs almost $9 per bottle – much cheaper than nationally-known Olay and, according to my local guide, “not expensive”. Chinese women are very concerned about the damage to their hair and faces from dirt and pollution and while, according to the China head of L’Oreal, they are very money-conscious and discriminating consumers, shampoo and body cream are becoming must items in their budgets.

At the other extreme, but in the still-provincial town of Shijiazhuang, which is a far cry from Shanghai or Beijing, a local department store had three different stands selling treadmills! The highest priced, at the equivalent of $7500, not surprisingly was not selling. Furthermore, in a town where obesity clearly is not a problem and where so many people still commute by bike, one would think that treadmills are not exactly a priority item. But the attendant at one of the stands told us that she was selling 15 units per month of the second most expensive model, at $750 a piece. In the same department store, modern hi-fi and TV equipment was extensively displayed. I knew that the young Chinese are keen on all that type of equipment, but a $7500 flat-screen 50’’ plasma TV? The store was selling about ten of those every month.

Not only are there wide differences between average incomes and the revenues of local entrepreneurs (of which there are many), but there also are different consumer priorities in China than in the West and, most importantly, different ways to show off. Electronics and ultramodern gadgets such as the treadmill are leading ways to impress one’s neighbors.

The Average Budget Remains Basic – Even In Second-Tier Cities

Most “average” Chinese do not eat in restaurants often, even if there are more and more of those and they always seem full. At home, they do not spend much on food and even in a famous noodle restaurant in Taiyuan, I paid less than $5 for four dinners – with Tsingtao beer. A dinner in a trendy Shanghai restaurant would cost upwards of $20 per person.

As for clothes, they are also simple: basic pants and shirt for men, probably costing less than $15 altogether and a nice but simple and not very ample wardrobe for women, are the norm. Shanghai malls have all the latest international designer models on display, and many elegant women wear them. But the best department store in a smaller town like Taiyuan might display $50-$100 dresses -- and even those would only be bought for special occasions or by women lucky enough to work for foreign joint ventures. More typically, a young female office worker might try to buy dresses or a pant-and-top ensemble for $25-$30. Also typically, they would not dress in a department store, but rather in a smaller (and cheaper) boutique. Or they would buy a nice fabric and have the dress made. So the annual small-town family budget for clothes, while not insignificant, is not overwhelming either. If they pay little for food and lodging, and only a little more for basic clothes, provincial Chinese still have discretionary income, even on low salaries.

Discretionary purchases have been increasing with the broader choice, but they have a lot of room to grow. In big coastal cities, for example, the market for air-conditioners is said to be saturated. But in Baoding, for example, only about half of the households reportedly own an air-conditioner. In Xushui, only about one third might own one. More or less the same pattern seems to apply to refrigerators and washing machines. As for villages, the consumption story is even more remote from Shanghai’s or Beijing’s than in the provincial cities I just reviewed. I will relate some visits in Part III of this series.

François Sicart

June 19, 2004

The information contained herein has been obtained from sources believed to be reliable and to the best of our knowledge is complete. The validity and completeness however cannot be guaranteed by Tocqueville Asset Management. Nothing herein constitutes investment or any other advice and should not be relied upon as such. This document has been prepared solely for information purposes and does not constitute an offer or an invitation to buy or sell securities. Any reference to past performance is not necessarily a guide to the future. Tocqueville Asset Management L.P., their affiliates and their officers, directors, employees, advisors or members of their families as well as the clients for whom they manage portfolios; 1) May have positions in securities or options of issuers mentioned herein and may make purchases or sales of the securities or options while this publication is in circulation; 2) May hold directorships in corporations discussed in this publication. The opinions expressed in this document are those of Tocqueville Asset Management as of the date of the writing and are subject to change.