In the past 10 years, China has consistently demonstrated its economic might. At its peak, GDP was growing at 10% per annum. Though China took its toll in the global financial crisis, it soon showed its resilience and became a leading force in the global recovery.

This year, it surpassed Japan as the second largest economy in the world. China also holds the world’s biggest foreign reserves with a staggering US$2.45 trillion. At a national level, China is indeed a wealthy country.

But another fact remains: half of the Chinese population live in poverty. Considering the size of that population, that means more than 650 million people are poor.

Chinese economy is underpinned by its exports and cheap labor. Its consumption lags behind its production. Chinese consumers, despite the huge number and potential, consume only a small portion of its own goods.

However, Chinese people’s spending power should not be underestimated. They have voracious appetite if you look at the well-off families. But the proportion of these “squanderers” is small among the whole population. The other thing is that though the living standard in China is considered lower than rich nations, it is actually higher if we look at it from another perspective.

Let’s look at a simple example. An average worker in China earns about RMB1,000 a month. In Singapore, it is around SGD1,000. Yes, the rental, food and necessities are much cheaper in China. You may as well say these two workers are almost at the same level. But when it comes to relatively luxury service or merchandise, they two will form a stark contrast.

If the Chinese worker wants to see a movie, he needs to pay RMB50. In Singapore, it is the same price in dollar terms: SGD10. But if we translate this into the proportion of monthly wage, we will find the Chinese worker in a much disadvantaged position:

RMB50 / RMB1,000 = 5%;
SGD10 / SGD1,000 = 1%.

The same rationale goes for many things. An iPhone costs RMB5,000 in China, while it is SGD1,000 in Singapore. They are the same price in dollar terms, but the Chinese worker may need to wait half a year to get one. Most probably he will drop the idea of getting one.

Ironically, the prices of goods at shopping malls in Chinese cities are unbelievably steep. I remember walking in the malls back in Changsha, the capital city of Hunan province, any branded apparel was tagged no less than RMB1,000, such as a pair of sneakers, a jacket or a piece of jeans. While in Singapore, the same brands are priced within the range of SGD100 – SGD150.

Let’s say I make RMB5,000 a month in Changsha, which is considered well paid. Spend 1/5 of my monthly salary on a pair of shoes? Oh no, thanks!

It’s quite understandable why it is difficult for an average Chinese family to spend a little bit more than their needs. They simply can’t afford it.

Here comes another question: why don’t the Chinese borrow? It makes perfect sense for one in Singapore or western countries to use credit.

In China, saving is not only a virtue passed down from old generations, it is also the norm. Unlike rich nations, China doesn’t provide much coverage for medical expenses. (Well, it does provide medical insurance to its citizens, but the coverage is far less than enough, especially when it comes to major diseases that cost a lot for treatment.) Without the protection of that social safety net, people are afraid to spend. Money is saved for unexpected occasions, such as major illnesses or accidents. If they can’t pay the bills, nobody will.

Most young people of my generation are unable to pay for a house outright in China. With their wages and the high property prices that are outrageously disproportionate to their income, it will take a hundred years for them to pay for a house up front. The only clear-cut way is getting the savings from their parents. When they have children of their own, they inherit the same mindset: save for their offspring in case of emergency or special need.

Chinese workers deserve more than they make now. If their wages are raised, they are more likely to spend. The more they spend, the larger fraction that consumption makes up in the Chinese economy, and the bigger market China becomes. The health care policy and pension system reform is also critical to give Chinese people the freedom to spend without fear of uncertainty.

If China is able to transform its own market to a more consumerism-based one, it will ultimately do much good for the world. Anyway, China’s economy cannot and should not always rely on its cheap labor, if China wants to remain competitive.