China in Transition

# Behind China's Car Ownership Boom - Uneven distribution of wealth rather than rising income

Chi Hung KWAN
Consulting Fellow, RIETI

China's import tariffs on automobiles have been greatly slashed following its entry into the World Trade Organization, and coupled with the huge increase in investment by foreign carmakers the country is seeing a car ownership boom. Helped also by a reduction in prices, passenger car sales for the first half of the current year topped 840,000 units, marking an 82% rise on the same period last year. In addition, core auto demand, which has traditionally been the purchase of cars for official use by government bodies and corporations, is also shifting to privately-owned vehicles. However, even though car prices are falling, it does not change the fact that car ownership remains beyond the reach of the ordinary Chinese. For example, a Honda Accord carries a price tag of 250,000 yuan (roughly ¥4 million), or more than 20 times the average annual income of a Chinese. Nevertheless, it currently takes about 10 months from order to delivery because production cannot catch up with the demand. Where does this purchasing power come from?

Generally speaking, purchasing power rises in proportion to income growth. Certainly, ever since China adopted market-opening reforms, the income of the Chinese people has risen considerably against the backdrop of high economic growth. Per capita gross domestic product, which stood at some $200 at the start of the reforms, has risen to$1,000. On top of this, prices in China are much lower than those in industrialized countries, so the actual purchasing power of the same \$1,000 is much greater. However, what is cheap in China are non-tradable goods such as services, while industrial goods are in many cases more expensive at home than abroad, reflecting such factors as import tariffs. In the case of automobiles, the price of a Honda Accord made in China is 60% more expensive than its price in Japan, and it is not selling because it is cheap.

Meanwhile, in contrast to the brisk sales of automobiles, consumption on the whole is sluggish. Such a consumption pattern reflects the uneven distribution of income, rather than a rising income. In the first place, no one would buy a car using more than 20 years' worth of income. As shown by the fact that most auto purchases are made through cash transactions without loans, it is clear that the buyers are limited to the wealthy, who comprise only a very small portion of the population. But of course, what with the population being 1.3 billion, so that even just 1% of that comes to 13 million, automakers still see China as a market with very high potential.

A survey on the assets of urban households conducted by China's National Bureau of Statistics in 2002 (Chinese Only) shows exactly this sort of situation when it comes to car ownership. According to the survey, on average there are only 3 cars for every 100 households. However, the figure rises to 38 among households with an annual income between 80,000 yuan and 100,000 yuan, and 65 for households with incomes over 100,000 yuan. The survey shows that the core of this wealthy class is made up of "managers of stock companies" and "owners of private enterprises," each comprising 0.6% and 1.2% respectively of the sample. "Managers of stock companies" include many senior government and company officials who amassed their wealth overnight through the privatizing of state-owned enterprises that has been progressing in recent years. Reflecting this, the Gini coefficient, which shows the degree of inequality among urban residents, is much higher when calculated in terms of assets (0.51) than in terms of income (0.32). Through such facts, it is easy to surmise that out of the private car owners, there are more people who should be called the new rich than high-income earners.

For most people, the purpose of buying a car is not so much its usefulness (the convenience of driving) than a means of displaying their social status. This is the "conspicuous consumption" mentioned by the American economist Thorstein Veblen in his book "The Theory of The Leisure Class," first published in 1899. This car ownership boom that has blossomed amid the bipolarization of income and wealth distribution should be seen as a symbol of the distortions in the Chinese economy, rather than its prosperity.

August 8, 2003
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