China's Consumers Are Starting to Spend - Gross

These are grim times for American executives. The public is angry, and consumers are holding on to every nickel. It's hard to escape the sense that the economic future may be less comfortable than the past. But not all American managers are gloomy. "Optimism is higher than it was last year," says Brenda Lei Foster, president of the American Chamber of Commerce in Shanghai. A survey of its 370 members found that more than 90 percent are optimistic about the next five years. The reason: instead of simply shipping goods made in China back to the U.S., "companies here [are] focusing on the Chinese domestic market." (Click here to follow Daniel Gross).

Shanghai, where I landed the same day as President Obama, is no more representative of China than New York is of the U.S. But this supercharged financial center offers a glimpse of China's consumer-oriented future. When Stephen Green, chief economist at Standard Chartered Bank, first came to Shanghai in 2000, the foreigners were rich. "Now the Shanghainese are rich, and the foreigners are poor by comparison," he says. The biggest change the past several years: "More Porsches."

Shanghai's economy grew at a 12 percent clip between 1993 and 2008. And in the wake of the global financial meltdown, while exports fell, the economy continued to expand—largely due to local demand. Xinitiandi Street, home to the building where the first Communist Party Congress was held, has evolved into a place where the bourgeoisie come to spend their money. There are jewelry shops, a Starbucks, and, around the corner, a Rolls-Royce dealership.

Companies that initially came to China to manufacture products for export are now focusing their attention on the rising domestic market, as a large middle class takes shape. A sizable portion of the world's toys are made in China, but Toys "R" Us now has 15 stores—small ones, not big boxes—in the country, too. Best Buy, which has been importing electronics from the region for years, is deploying its Geek Squads to several stores in Shanghai. They came for the cheap labor but are staying for the spending power.

In addition to making anti-aging creams in China, Mary Kay, the all-American direct-sales cosmetics operation, is now selling them there. With 200,000 women hawking its wares, Mary Kay's sales are up 20 percent so far this year. Like many other American brands—KFC, McDonald's—Mary Kay has shifted from being a down-market domestic brand to an aspirational foreign one. "We're a premium brand, like Häagen-Dazs or Starbucks," says Paul Mak, president of Mary Kay China.

While U.S. banks are reining in lines of credit, Bank of Communications—a large Shanghai-based lender in which British giant HSBC owns a large stake—is just now beginning to roll out credit cards. But the concept of buying stuff you can't pay for is still alien to many Chinese consumers; 80 percent of cardholders pay off their balance each month. That's changing, though. While older and poorer Chinese still save up to one third of their income, those who came of age during China's economic boom are becoming spenders. "Anyone born after 1980 behaves like an American," says Stephen Green.

The historical habit of saving and the rising propensity to spend are precisely why President Obama came to China in November. "We do not seek to contain China's rise," he said in a meeting with students in Shanghai—his first stop. And why would we want to? China now offers Americans two things we dearly need—a supply of cheap credit to fuel our deficits and recovery efforts and a growing market that is receptive to American goods and brands.

Obama isn't the only world leader taking a fast plane to China. At a hall promoting Expo 2010, the massive world's fair Shanghai is hosting next year, a stunning 3-D video shows the futuristic pavilions that nations are planning to erect as part of the spectacle. (Luxembourg's seems larger than the country itself.) Shanghai is ready for the influx. Pudong International Airport is a vast, hushed cathedral-like space, since flying is still beyond the financial reach of many Chinese. And the maglev train, the world's fastest, stands ready to whisk visitors to town. As the train reaches a maximum speed of 267 miles per hour, the carriage is so smooth and steady, you can stand. The 25-mile run is over in seven minutes. When it passes its outbound counterpart in a whoosh and a blur, you can catch a fleeting glimpse of the Pacific Century.

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