Macroeconomic Evaluation of China’s Consumers
With China’s economic rise, a new type of consumer is being born. Incomes are rising, consumers are feeling increasingly optimistic about their financial futures and new consumer demographics are emerging.
The Global Financial Crisis in 2008 had caused economic downturn in most of the world, yet it did virtually nothing to curb China’s growing retail sales, which were estimated to have steadily increased by at least 11 percent year-on-year since 2007.
This more curious and affluent market has driven up demand for foreign goods. As such, with sales sagging abroad, a variety of foreign firms are looking to sell to the Chinese consumer market.
Multinational department store chains such as Walmart and Carrefour; global automakers from BMW and General Motors; and international fashion retailers such as Gap and H&M have all contributed to this growth within the last few years, and have already established a strong foothold in many major cities. Business failures (such as Best Buy’s pull out of the country) have been hotly discussed, but the massive market potential has left many foreign companies undeterred.
In the 2011 PwC Global CEO Survey, 33 percent of retail CEOs dubbed China the most important company for growth over the next three years – quite a powerful statement of confidence in the rise of the Chinese consumer.
This all begs the question of what ever happened to the thrifty (or yet unempowered) Chinese consumers, with one of the highest savings rates in the world. Alive and well...yet a demographic in transition. The real excitement about the Chinese consumer is largely based on potential.
China’s consumer spending composes a surprisingly small portion of its economy. Private consumption accounts for only 36 percent of China’s GDP, a low figure compared to other major economies. For the United States, United Kingdom and Japan, consumption adds up to approximately 71 percent, 67 percent and 55 percent respectively.(1)
Low private consumption is largely due to the country’s traditional strategy for economic growth. China has long inhibited local consumption in favor of the accumulation of capital, followed by heavy investments into local production and export goods.
This can be seen in some of the older financial structures of state-owned enterprises (SOEs), which typically did not have a standard system of issuing dividends. Instead, earnings were often retained by companies, and invested into projects that can generate even more capital. Since SOEs represent a large portion of China’s growth, their inability to pay out their profits to the investing public are seen as a major cause for China’s low consumption. Further, the salary structure of such firms tends to put a great deal of money in the hands of a just a few...hardly empowering the consumer masses.
On a microeconomic level, combined with a widely-held tradition of frugality (to which different analysts attribute different levels of influence on savings rates), many potential consumers save large amounts of money for necessities such as healthcare and especially education. Even as China’s consumer credit system is expanding rapidly and credit becomes more available, not many consumers are actively using it.
Some academics hold that the Global Financial Crisis of 2008 was a wake-up call for many of the country’s officials and business leaders. Academics from this camp hold that the financial crisis demonstrated just how vulnerable the industry and export-centered economy is to foreign shocks. Others hold that – while pre-2011 indicators may have suggested such a transition – the Chinese government has yet to take any real action to empower its consumer masses.
Key to the potential of the Chinese consumer is age. The growing demand for more expensive foreign name brands and imported goods (especially the case for the industries in food, clothing and luxury items), is largely from China’s younger generation. Surveys have shown that the majority of Chinese consumers for luxury products are aged between 20 and 40 - considerably younger than those in the United States and Europe, who are typically in the 40 to 70 age range.
This spending is believed largely to be based on a sense of financial security and future optimism, as the prices for these goods are relatively constant between these countries, yet the younger Chinese shoppers are not earning more than their Western counterparts.(2)
High Potential Sectors to Sell to China
Among the growing sectors with the highest potential in retail sales are healthcare and food and beverages. Increasing penetration to lower-tiered cities will only continue to foster this opportunity.
Dezan Shira & Associates is a foreign direct investment practice offering business advisory, tax, accounting, due diligence, payroll and audit service to multinational clients in China, Hong Kong, India, and Vietnam. For professional advice on common accounting practices in China, please contact Dezan Shira & Associates at firstname.lastname@example.org or visit www.dezshira.com.
(1) McKinsey & Company. Unleashing he Chinese Consumer. 2010
(2) KPMG. http://www.kpmg.com/CN/en/IssuesanInsights/ArticlesPublications/Documents/Luxury-brands-China.pdf