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If, as I argued in my January 29 post , the free-spending, never met a credit card they didn’t like U.S. consumer of 2006 and earlier isn’t coming back within the next decade, who will pick up the slack? Who will buy all the cars, the flat-screen TVs, the steel, the natural gas that the global economy is geared up to produce?

The hopeful answer, of course, is China’s growing numbers of middle class consumers. Not only does that country’s growing wealth add hundreds of millions of buyers to the markets for everything from designer sunglasses to air conditioners, the Chinese government is committed to policies that will grow domestic consumption in China.

All the world has to do is wait and the Chinese consumer will pick up the shopping bags dropped by exhausted U.S. consumers and spend the global economy back to prosperity.

At least that’s how the hopeful story goes.

But a new study from McKinsey & Co. makes me doubt exactly how much global lifting China’s consumers will be able to do over the next couple of decades.

The big obstacle is the heavy structural emphasis in the Chinese economy on exports and government-led investment. Currently domestic consumption makes up just 36% of GDP.

In 2007 China was, in aggregate the fifth-largest consumer market in the world behind the United States, Japan, the United Kingdom, and Germany. But China’s consumer spending accounts for a much lower percentage of the economy—just 36% in 2008–than in the United States (where consumer spending accounted for 71% of GDP in 2008) or in the United Kingdom (where consumer consumption accounted for 67%) or Japan (where consumer consumption accounted for 55% of GDP).

China’s consumer consumption to GDP ratio is low even for the developing world. Brazil’s ratio came in at 65% in 2008, India’s at 57% and Thailand at 54%. As McKinsey points out China has the lowest consumption-to-GDP Ratio of any major world economy except Saudi Arabia where oil exports account for a huge share of the economy

And in fact China’s consumer has been losing ground since 1990 when consumer consumption accounted for about 51% of GDP.

So what would it take to get that ratio up in China?

The study (and you can find a summary of it at ) looks at three scenarios for the future trend of consumer demand in China.

First, there’s what McKinsey calls the base case. In this scenario, the Beijing government doesn’t do anything to increase consumer spending in China. Any gains in the share of the economy going into consumer consumption come from the increasing wealth of Chinese consumers as the economy grows. Under this scenario consumption rises to about 39% of GDP over the next fifteen years.

Second, there’s the policy scenario. In this case the Chinese government fully implements the changes that I have already announced for promoting consumer consumption. Under this scenario consumption rises to 45% of GDP. That’s a big increase but still leaves consumer consumption with a smaller share of the economy than in South Korea (where consumer consumption accounts for 48% of economic activity.)

Third, there’s what McKinsey calls the stretch scenario. In this case the Chinese government implements new policies to reorder the country’s economy. This effort could push consumption up to 50% of GDP, still short of the consumption/GDP ratio of countries such as the United States, the United Kingdom, and Canada (at 60%    ) or France (at 58%), but creeping toward Japan’s 55% ratio.

This third scenario would add $1.9 trillion a year in consumption to the global economy.

China’s government seems committed to the pro-consumer changes that make up McKinsey’s second scenario. Those changes concentrate on repairing the social safety net in China so that Chinese families feel more secure and don’t believe they have to put away quite so much in savings. The average Chinese family now saves about 25% of its discretionary income. That’s three times the savings rate for Japan, a country of notorious savers, and 15 percentage points above the GDP-weighted average for Asia as a whole.

The changes that have been proposed so far include health insurance and better pensions. Lower school fees and more aid so that Chinese families don’t have to save as much to send their children to college. (McKinsey found in surveys that saving for the cost of a university education was the No. 1 reason for families to save.) Implement those, the theory goes, and Chinese families would feel able to save less.

But, according to McKinsey’s models, these plans would do very little to increase consumption as a percentage of GDP. More financing for education, for example, would add just 0.4 to 0.7 percentage points to the current 36% consumption to GDP ratio. Better health care would add just 0.4 to 0.6 percentage points.

To get to the major shift of the third scenario, the one that would pump $1.9 trillion a year in new consumer spending into the global economy, China’s government would have to make radical changes in the Chinese economy.

Real wages would have to climb: currently even taking into account an artificially undervalued currency and lower prices for many goods in China, it takes a Chinese worker seven hours to buy the same goods and services that a U.S. worker pays for after one hour o work.

Interest rates would have to rise from the low levels set by the government so that Chinese savers could earn a reasonable return on their money and could save a smaller part of their income.

The government would have to expand consumer access to credit. Outstanding consumer credit is just 3% of GDP. In Brazil it’s 12%.

These steps McKinsey estimates could raise consumers’ share of the economy by roughly 3 to 5 percentage points.

All this is important for investors anywhere in the world for two reasons.

First, the Chinese government’s announced plan to raise domestic consumer spending as a percentage of GDP will make domestic (and foreign companies with a presence in the Chinese domestic economy) companies in fields such as life insurance, medical services, and health care products good investments. And as the share of the domestic economy going to consumers increases, companies selling consumer goods—at the right price point—in the domestic economy will profit.

Some names? Coach (COH), Luxottica (LUX), China Mobile (CHL), China Life Insurance (LFC), (CTRP), and Home Inns and Hotels Management (HMIN). Most of these are either in one of my portfolios such as Coach or on my new Jim’s Watch List. I’ll be adding Home Inns and Hotels Management to my watch list with this post.

Second, I don’t expect that the Chinese government will turn the country’s economy inside out to give domestic consumption a bigger piece of the pie than it gets under scenario No. 2. I’m afraid that means that China’s consumers won’t be picking up enough clout to soak up all the excess capacity built up in the global economy. For more on global excess capacity see my post

In that post I mentioned three themes—brands, service and distribution networks, and technology–to use to fill a portfolio with stocks that will profit despite this excess capacity.

Third, I think you can overweight your portfolio not to China but to other economies in the developing world that offer a better balance of domestic consumer spending, on the one hand, and exports and fixed asset investment on the other than China does. I’ve got one country in mind, Brazil.

In my next column I’m explain to you why I think Brazil is a better long-term play—say over the 15 years of the McKinsey study—than China.

Full disclosure: I own shares of the following stocks mentioned in this post in my personal portfolio: Coach and