Stanley Chao, a Los Angeles-based author and business consultant, has a unique take on what may happen in the world’s second-biggest economy in the next few years — especially with regard to Chinese consumers.
Unlike China demonizers such as Gordon Chang, he doesn’t predict dire events for the country. Chao argues in a coming second edition of Selling to China: A Guide to Doing Business in China for Small- and Medium-Sized Companies, that the Middle Kingdom’s upheavals are in the rear-view mirror. “Going forward, it’s going to be about tweaking and making minor changes to the system,” Chao says in a new chapter, titled ‘Forecasting China’s Future.’ The book is due in April.
There will, he says, be thorny problems with shadow loans and the bumps that go with rebalancing an investment-led economy with a domestic consumer-led one. But the ex-Asia-Pacific exec for Softbank’s Masayoshi Son argues that China is nowhere near collapse and that its best days lie ahead. He believes consumer spending will reignite in five years and that GDP growth could hit 10-12%.
His predictions carry one caveat, however. “They are all predicated on the central government’s ability to clean-up both its corruption and pollution problems,” Chao writes. Like others, he notes those twin maladies have done the most to sow popular discontent and that the Communist Party’s survival is doubtful if these issues aren’t resolved.
Chao, however, diverges by noting that China’s current anti-corruption drive is having the desired effect. Though critics contend that President Xi Jinping has used the campaign to destroy rivals, Chao argues the effort is chilling graft. “Since 2012, more than 130,000 people have been arrested for corruption, and in 2016 alone, more than 120 high-ranking officials were either jailed or executed,” Chao says in the book. On pollution, he emphasizes that officials are pouring billions into clean energy, water treatment processes, soil remediation, and waste management.
Nonetheless, the analyst says it’s difficult to overstate the need to root out corruption due to its pervasive, but little-appreciated, impact on crucial areas like consumer spending.
Chao notes that foreign economists zero in on the fact that sales at China’s top 100 retailers fell by 3.2% in the first half of 2016 and that luxury goods sales sank 2% in the same period. This caused many to doubt the resilience of China’s consumers. Some forecast more downturns in spending.
But Chao sees the anti-corruption drive’s impact on such figures.
“What do these numbers mean, though? First of all, it means that the middle class is continually spending at a rapid pace, buying Big Macs, movie tickets, and Starbucks coffee,” Chao writes. “Meanwhile, China’s upper class, fearing the anti-graft measures the government is taking, has halted their luxury buying sprees.”
A tale of two Changs
Chao asserts such spending by the middle and upper classes must be rebalanced if China’s economy is to move ahead. It all boils down to a struggle between two consumer groups that Chao dubs the “Average Chang” and the “Corrupt Chang.”
“(Average Chang) is the one we hear about most in the news,” Chao writes. “He has a good job, a family, and aspirations similar to what you and I want for our futures. Contrary to what you read, average Chang is actually in wonderful financial shape and doing exactly what the Chinese Communist Party predicted he would do: spending more and more.”
Chinese planners expect Average Chang to be the main dynamo for economic growth as the country switches from an investment-backed economy to a consumer-based one.
The second type, the Corrupt Chang, lives in the underground world. “Corrupt Chang is typically one of the following: a government official on the take, a private businessperson, or a C-level manager at a state-owned company. His money comes from corruption, bribery, and money laundering,” Chao says. “Up until a few years ago, Corrupt Chang was the main source fueling all consumer spending, but that’s changing now.”
Why haven’t we heard more about Corrupt Chang’s impact on the economy? Chao says this is because economists can’t pinpoint how much the underground economy really contributes to overall consumer spending.
While Chao can’t quantify such corruption, he quotes a lot of anecdotal experience to back his assertions.
“Almost every meeting I had with government officials or state-owned enterprises (SOEs) in China during the mid-2000s took place over an extravagant dinner,” Chao recalls in his book. In one instance, he and his clients had dinner with the representatives of a small SOE in Zhoushan, an archipelago of islands along China’s east coast. The government company was involved in catching, packaging and selling fish.
“It was the ultimate fine-dining experience: live Alaskan king crab, New Zealand abalone, Russian caviar, truffles and carton loads of thousand dollar bottles of French champagne. And the bill was just as excessive: $60,000. Not in Chinese renminbi, but in American dollars! The total damages for the night, after adding the after-dinner shenanigans, easily topped $100,000. And they wanted to do it all over again the next night.”
He later learned from one of the company’s managers that the restaurant and company executives were in cahoots: the bosses paid the check using their company credit card but were later reimbursed half the total in a brown paper bag.
A government official on the take in China rakes in hundreds of thousands – if not millions – of dollars, according to Chao. “I once met a son of a government official who admitted to having over 50 million in cash stowed away in a closet,” he writes. The college student drove a Lamborghini, a Porsche, and several Ferraris. He also owned several mansions in Beverly Hills and wore Armani suits, Bruno Magli shoes and Rolex watches.
But Chao contends such extravagant abuses are declining.
He reports that, since 2013, over 3,000 restaurants in Beijing alone have closed down. “Most of them were just fronts for corruption and money laundering. I myself have not been invited out to a single meal since 2013,” he writes in his book. “Government officials, who want to keep their noses clean, stay away from restaurants, karaoke bars, and anything else that reeks of hanky panky. They won’t even buy me a mocha latte at Starbucks.”
Meanwhile, the nickel-and-dime consumables like Starbucks, Kentucky Fried Chicken and Nike shoes that Average Chang buys are doing great.
Case in point: Starbucks, in early 2017, announced record profits in China. Yum Brands and McDonalds rolled out similar record results.
GDP will rebound to 10-12%
China critics in the US will disagree. But Chao argues that the Communist Party knows what it’s doing in tackling corruption and restructuring consumer spending. “It’ll just take some time and patience,” Chao argues.
He anticipates that China’s consumer market will take off again some time in 2021 or 2022, and that this will allow China’s GDP to hit record growth rates of 10-12%.
“Corrupt Chang is a thing of the past; he was a good economic stimulator, but unsustainable and a threat to China’s longevity,” Chao concludes in his book. “China’s future lies in Average Chang. He’s stable, secure, and the cornerstone to a vibrant and healthy China.”