Hey, Small Spender

Are Chinese consumers ready to save the world by finally taking their place alongside profligate American shoppers? A glance at the sales numbers seems to indicate they are. While U.S. consumers stayed home fretting over their depressed home values and depressing brokerage statements, their Chinese counterparts hit the stores. Retail sales jumped 15.2 percent in China in May, as home and car sales soared. Even with exports collapsing—down 26.4 percent in the past year—China's economy may grow by as much as 8 percent this year. To some experts, that is evidence that the country's booming middle class is driving a recovery.

It's a scenario that should warm the hearts of Chinese manufacturers and McDonald's executives alike. But it's misleading. The big spender driving the Chinese boom is not the individual—it's the government. And no government can spend as freely right now as China's Communist Party, with its nearly $2 trillion in reserves and unchecked budget authority. Beijing's stimulus plan amounts to 4 percent of GDP, double America's 2 percent, and China didn't have to resort to foreign borrowing. Government investment is up over 30 percent since the beginning of the year—spending on rail lines and roads has more than doubled in the past year. Subsidies are multiplying, as central and local governments pump money into idle factories and retraining workers. Government lending—and the party's strong suggestions that banks should lend more—is helping apartment sales surge, as are new real-estate tax cuts. The state is even handing out vouchers directly to consumers for cars, refrigerators and other products.

China's overall recovery is real, and that's good news for most other economies in the world. But the government's largesse is obscuring the degree to which China still depends on subsidized exports to America. The global downturn is hitting hard in places like Guangdong province, a southern factory hub that produces about a quarter of China's exports. There, five-star hotels stand empty, while job centers for laid-off migrant workers are full. On a recent evening, the Pearl River itself seemed dimmer—many of the garish light displays that usually blaze from waterfront inns and restaurants had been turned off "to save electricity," says Su Caifang, deputy director general of the Guangdong Foreign Affairs Office. "We're still very export-dependent, especially on America," says Su.

It's an honest admission, one that undercuts all the talk about a middle-class Chinese consumer poised to take the place of Wal-Mart moms. Local officials from around the Pearl River Delta like to talk about how they are now traveling inland to Hunan or Sichuan province to sell their own countrymen the consumer electronics, jewelry, cheap clothing and shoes that they once sent abroad. Yet sales are a drop in the bucket compared with the enormous market outside China. There's a sense that the U.S. market will take years to rebound—and may never reach its former spendthrift glory—while the Chinese market will also take a long time to reach critical mass. "Even before the financial crisis, we knew we needed to move beyond the U.S. market," says Allan S.K. Lam, vice general manager of Hua Jian Group, a shoe manufacturer that makes much of what you see in stores like Nine West, Kenneth Cole and Coach. "But it's going to take at least five years, perhaps even eight years, to develop the Chinese domestic market in an important way."

It will take much longer than that for the Chinese to rival Americans as consumers: Chinese incomes are about one tenth those in America, and total consumer spending in dollar terms was about $1.7 trillion in 2007, compared with $12 trillion in the U.S. Meanwhile, the individual savings rate in China is 30 percent, compared with less than 5 percent in the U.S. The reason: most Chinese get no pensions and have to pay cash in advance for health care. In China, saving for a rainy day is serious business.

Locals in Guangdong know the situation is more precarious than government figures make it seem. "I've talked to a number of factory owners in the area and they tell me that if they can't get more orders in six weeks, they may go out of business," says Ding Li, director of the Center for Regional and Corporate Competitiveness Research at the Guangdong Academy of Social Sciences.