I chose this theme —The Rise of the Asian Consumer— for our 2nd Quarter 2018 Wrap Up because this rise is a primary investment trend. Primary trends have a major impact and stay with us for decades. There is an expression in investment, “The trend is your friend.” You want to understand and align your investments with the primary trends, including your attention, time, and money.
The rise of the Asian consumer is not just about the number of shoppers, but also about where financial and economic wealth will grow and how that wealth will translate into geopolitical power. It’s about the people that corporations and politicians care about most and serve. It’s also about managing our political and monetary risks—such as covert wars and inflation—as governments and central banks compete for natural resources and capital.
The Brookings Institution published a study on the rise of the global middle class in 2017: “The Unprecedented Expansion of the Global Middle Class” by Homi Kharas. It’s linked in the bibliography in this section. Michael Schuman summarized the study in a subsequent article in US News & World Report, “The Rise of the Asian Consumer: The Lightning-fast Expansion of the Middle Class Across Asia Underscores an Ongoing Global Transition of Economic Might.” Schuman states:
The newly wealthy Asian family is becoming more important to the world than the American middle-class household. There is no underestimating what that shift means. It is reshaping the global economic order as we’ve known it.
The history of investment is about demographics and geography, as well as technology and warfare. The actual number of people involved in the rise of the Asian consumer makes this shift tsunami-like in scope. Schuman continues:
According to a 2017 study by the Brookings Institution, 88 percent of the next 1 billion people to enter the middle class globally will be Asians.
Think about this—he is describing 880 million people. Schuman continues:
The size of the Asian middle class is expected to reach nearly 3.5 billion people, or 65 percent of the world’s total, by 2030.
Remember we are in 2018 now, so 2030 is only 12 years away. Schuman continues:
[That is] a dramatic increase from 1.4 billion in 2015. …Brookings figures that in 2015, newly wealthy consumers in China and India already outspent their American counterparts, accounting for a combined 17 percent of consumption by the global middle class compared to 13 percent for the U.S.
This means that the Asian market has already surpassed that of the U.S. middle class. Schuman continues:
That gap will continue to widen. By 2030, the middle class in China and India will spend 39% of the global total; the U.S. will account for just 7 percent.
I want you to digest these numbers—let them sink in. The Asian middle-class population is bigger now than the middle class in Europe and North America combined. The Asian middle class will be 10 times bigger than the North American middle class in 2030, and Asian markets are going to become 5 to 10 times bigger as well.
I often hear people in America say, “But the middle class is shrinking.” No, it’s not; it’s exploding across the globe. If you are in a country where the middle class is stagnant or shrinking, it is important that you see the full picture.
This change of the global economic order will be significant for people in America and the G7 nations. Since World War II, the U.S. consumer has been the focal point of world consumer markets. Access to the U.S. consumer market was the heart of the Bretton Woods system as well as U.S. Navy control of global sea lanes. With the consolidation of the European Union in the 1990s, Europe became the biggest consumer market, so that the G7 became the focal point for both the United States and European nations. Now the focal point is shifting to Asia. It’s not shifting to all the emerging markets; it is shifting to Asia—the preeminent emerging market.
Let’s walk through some of the numbers in the Brookings study. In 2015, the Asia-Pacific region, which includes the Pacific Rim, counted 1.38 billion people in its middle class. By 2030, this number is expected to almost triple, rising to 3.5 billion.
The Brookings study anticipates that the European middle class will be relatively flat in terms of growth, going from 724 million people to 733 million. In 2015, North America starts with 335 million people, and then rises to 354 million by 2030. So, Europe and North America are staying at a billion, and the Asia-Pacific region is nearly tripling. Again, we are already in 2018, so the year 2030 is only 12 years away. Imagine it.
According to Brookings, the middle class in Central and South America will grow from 285 million people to 335 million. The Middle East and North Africa will grow from 192 million to 285 million, showing more significant growth than in Europe and North America, but still nothing compared to the Asia-Pacific region. The sub-Saharan African middle class will almost double, growing from 114 million people to 212 million—still a small number on a relative basis.
What this means is that the Asian middle class will be bigger than the rest of the middle class in the world. It’s going from approximately 46% of the global middle class to 65%. Its per capita income will be rising. This is an enormous shift in the economic order and market force.
You’ve heard me talk about how income convergence is an Asian phenomenon. It’s not a phenomenon in the other emerging markets, however. Its absence is important because we still see a wide disparity in per capita incomes. If you look at the IMF 2017 statistics for nominal per capita incomes, Switzerland had $81,000 per capita, the United States had $60,000, Hong Kong, $46,000, China, $8,643 (which looks relatively low inasmuch as there is still tremendous disparity between the coastal and urban regions in China and the rural West), and then India had almost $2,000 per capita.
Imagine a world where the per capita incomes of China and India converge with that of the United States—first, in terms of purchasing parity, and eventually, in nominal incomes. As this happens, that’s an enormous increase in purchasing power for that area of the world.
Right now, for example, if U.S. income is growing by 2% to 4% and China is growing at 6%, and that variation continues for any period of time, then ultimately we are going to experience income convergence. If this pattern continues after convergence, we would experience divergence where Asia pulls ahead.
It’s important to take the long view and look at events from a historical perspective. In one sense, Asia is returning to its former preeminence in the world economy. In 1820, China accounted for 30% of global GDP, and the U.S. accounted for 2%. China, in fact, was arguably the wealthiest country in the world 200 years ago. In a sense, China is returning to a historical position—one that it views as its rightful position in the world.
What knocked China out of top position? It was losing wars and failing to lead in the application of new technology.
China’s markets were forced open to trade, including narcotics trafficking, by the two Opium Wars. The first Opium War took place from 1839 to 1842. The second Opium War occurred in 1852 and between 1856-1860. Both weakened the Qing Dynasty, which ruled China from 1644 to 1912. Subsequently, China failed to industrialize while the Anglo-American alliance industrialized aggressively. Then the two World Wars further accelerated the Anglo-American ascendency over Asia. By 1950, the United States accounted for 20% of global GDP, and China produced 4.5%. These numbers represent hundreds of millions of people enduring a deep, grinding poverty.
I once had a college history professor who said that two empires had gone bankrupt trading with the Chinese. The first was the Roman Empire, where trade with China was a significant contributor to its collapse. The second was the British Empire, which was seriously threatened by the Chinese trade and silver drain, until its leaders figured out how to rebalance with force and opium.
Asia thinks of the West as violent. One of my favorite quotes is from Samuel Huntington, who wrote The Clash of Civilizations:
The West won the world not by the superiority of its ideas or values or religion to which few members of other civilizations were converted, but rather by its superiority in applying organized violence. Westerners often forget this fact; non-Westerners never do.
One recent quote from Xi Jinping illustrates the theme:
Some foreigners with full bellies and nothing better to do engage in finger pointing at us. First, China does not export revolution; second, it does not export famine and poverty; and third, it does not mess around with you. So what else is there to say?
It’s important to remember when you think about the rise of the Asian consumer that China and India are ancient cultures, and many parts of Europe are also ancient cultures. The non-European parts of the English-speaking world where most Solari Report subscribers live are young cultures—Australia, Canada, New Zealand, and the United States. For ancient cultures like China and India, defeat was humiliating. The Opium Wars were humiliating. The World Wars were humiliating. The Vietnam War was humiliating. One thing you see and feel now as confidence in Asia grows is the Asian desire to reverse these defeats.
If you look at the story of the rise of the Asian consumer, the story is a simple story on one hand because it’s really just about the numbers. If you just look at the numbers and contemplate what it means for our middle class to remain static and the Asian middle class to triple in size between 2015 and 2030—essentially in the next 12 years—you can imagine a very significant, unprecedented phenomenon with unpredictable consequences.
However, the numbers are not the only factor at play in this shift. Four other factors will make Asian growth even more impactful.
First, this growth is going to happen at the same time that China, and to a lesser extent India, are reinvesting some newfound wealth in building toward superpower status. This growth will occur at the same time that new technologies will have a dramatic impact. One of the reasons that Asia is growing is the use of satellites, the Internet and other digital technology, and telecommunications. These technologies have an impact on all of our lives and how we interconnect with each other. We are also seeing a revolution in artificial intelligence, material science, biotechnology, and robotics. The blossoming of multiple applications of these new and powerful technologies will coincide with the rise of the Asian consumer.
Second, this shift is also regional. It’s about the rise of the entire Asian region. China is the juggernaut that built a low-cost and extensive manufacturing and engineering infrastructure in the process of trading with the United States and Europe after creation of the World Trade Organization (WTO). China is reinvesting a portion of that wealth to become the world’s leading superpower. One of the advantages China has is a one-party system with a serious ability to plan and to organize financially, politically, socially, and militarily. The rise of the geopolitical power of China is very much a part of the regional story. One question to ask is: Will we create an effective counterbalance to China’s dominance through regional alliances, or is China ultimately to reign supreme—first in the South China Sea, then in Asia, and ultimately throughout the world?
Recently, India’s Minister of External Affairs said:
We can pretend that China is not there, but China is there. Unless we put our economy on the right track, it is going to overwhelm us completely.
The Indians may feel that way now, but ultimately this statement will apply to every nation in the world.
Third, this Asian story is about brainpower. If you look at global IQs, the reality is that Asians, on average, have higher IQs than the rest of the population around the world. I put a link in the bibliography to “Average IQ by Country.” It states that average IQs in Hong Kong and Singapore are 108, in South Korea, 106, and in China and Japan, 105. Italy’s average IQ is 102. The U.S. average IQ is 98! That many more brains, each with more “processing power” on average, brings a significant disparity in capability and potential.
Fourth, those of you who have read our work on space exploration and investment know that one of the reasons I believe the West and the G7 nations decided to globalize the economy and build up China and India was a decision that the West needed potential Asian engineering capacity to significantly expand the human investment in space exploration. I found one estimate from Forbes in 2015 regarding engineering personnel:
According to research conducted by the World Economic Forum (which excludes China and India due to lack of data), Russia leads the way, producing an annual total of 454,000 graduates in engineering, manufacturing and construction. The United States is in second position with 237,826 while Iran rounds off the top three with 233,695. Developing economies including Indonesia and Vietnam have also made it into the top 10, producing 140,000 and 100,000 engineering graduates each year respectively. ~ Niall McCarthy
Some sources estimate that China graduates 1.2 million engineers and India graduates 1 million engineers annually. Whatever the actual numbers are, I expect the production of engineers to be significantly greater in both countries than in the U.S. or Anglo-American alliance.
Asia represents a cluster of societies that are graduating significant numbers in the areas of engineering, science, and technology—because they have a much bigger population and because that is their focus.
I often tell the story of being in Beijing in 1997, with a gentleman who worked for me who was a People’s Republic of China (PRC) citizen who had received his graduate degrees at MIT and then came to work at Hamilton Securities. We were reading the daily newspapers at breakfast. He was reading the Chinese papers. There was a major confrontation between the Clinton administration and the Chinese. He looked up from the headlines and said, “Do you understand what this fight is about?”
I said, “No, I really don’t.”
He said, “Your legislators are lawyers, and the lawyers are telling us that we have to do this, this, and this with respect to human rights. Our legislators are all engineers, and they are turning to your lawyers and saying, ‘How? How do we do that?’”
So, lawyers were dictating rules with little time spent to understand how to implement or the consequences involved, while the engineers were trying to figure out how to implement effectively without creating unwanted consequences. The fact remains that if you look at the U.S. tradition of a society governed by lawyers vs. engineers, I would suggest that if the United States rebalanced its leadership from lawyers to engineers, U.S. growth rates and health might improve significantly.
Finally, I would like to recommend some book and movie sources.
One of my favorite documentaries on the rise of the Asian consumer is Red Obsession, an Australian documentary about Chinese consumers cornering the Bordeaux wine market. It illuminates a number of important themes. You see the confidence of the Chinese and their enormous happiness and gratification about the success they’ve had over the last 30 years. You also see what happens when a large number of people with newly found wealth move into smaller markets, which many Western markets will become, vis-à-vis the size of the Asian market.
Red Obsession is a marvelous window into the dynamics of what happens when explosive growth in one region rocks markets on the other side of the world. You can find it along with other great movies and documentaries in our movie and documentary section to help you understand the rise of the Asian consumer.
If you check out our bibliography, you will find links to the Brookings 2017 study, as well as a Solari Report with Stephen Roach and several of my reviews on books about China.
If I could suggest one book to help you understand the phenomenon of Asian growth, it is Unbalanced: The Codependency of America and China by Stephen Roach. I interviewed Stephen on The Solari Report several years ago when he first published Unbalanced in 2014. It’s still the single best book I know to understand the extraordinary interdependence between the United States and China. Roach makes recommendations on how we can rebalance this codependency. China is in the midst of a serious undertaking to rebalance, yet the U.S. has been slow to do the same. The current trade war represents a U.S. effort to shift.
Essentially, Roach describes how China started buying U.S. Treasuries in the 1990s. The U.S. government used the money to increase government subsidies. The people who received the subsidies went down to Walmart and bought Chinese goods and through the buying, as Roach describes, the U.S. extended a false prosperity. I would also say that this pretense of prosperity helped the U.S. government use the housing bubble and the black budget to covertly finance secret programs, while China built a manufacturing juggernaut. The process accelerated when China was admitted to the WTO.
I recommend that you read Unbalanced and listen to my interview with Roach.
There are excellent lectures from Sir James Goldsmith and Hans Rosling in the video section of the bibliography, with other video selections that will help you as well. If you can’t get the benefit of traveling to New Delhi or Shanghai to experience this growth phenomenon first hand, I recommend spending some time with the bibliography and the movies and documentaries to access a wealth of information available online.
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