China's consumption boom is just getting started

A rising middle class and the rapid growth of the e-commerce sector show why China's transformation into a more consumption-based economy is far from over.

Chinese consumers spent $3.6 trillion on goods and services last year, an amount roughly equal to the GDP of European industrial powerhouse Germany. However it only represents 36 per cent of China's total GDP, compared to the world’s average of 60 per cent, according to a special report from Australia and New Zealand Banking Group.

The important news is that the country is already transforming itself into a more consumption-based economy. It must be said that many leading Chinese economists believe consumption has already grown substantially, representing a bigger slice of GDP than investment.

For example, Yiping Huang and Cai Feng, two of China’s best known economists calculate that China’s consumption has been growing rapidly and outstripping GDP growth since 2008. It contributed to 52 per cent of GDP in 2010, much larger than previously believed (A closer look at China's 'reluctant' consumers, April 22, and Does China over invest and under spend? March 21).

Although ANZ’s estimate of consumption as a share of Chinese GDP is different from Huang and Cai, they are nevertheless pointing to the same trend. According to ANZ’s calculation, China’s private consumption will represent 44 per cent of the country’s GDP at the end of this decade, when China is expected to overtake the US as the world’s largest economy.

When that happens, China’s consumer market will roughly be larger than two thirds of the US consumer market -- the largest in the world -- compared with just 40 per cent today. In the next few years, 100 million more middle-income households will enter the market and drive the country’s urban consumption.

So what are the driving forces behind China’s predicted consumption boom?

  1. The creation of a social security system that reduces the need for precautionary saving

The Chinese have abnormally high saving rates. Your average Mr and Mrs Zhou save more than 50 per cent of their income, compared to the global average of about 20 per cent, according to the International Monetary Fund.

A popular theory suggests the Chinese are saving a disproportionate amount of their incomes for “precautionary reasons”, in case they need the money for a rainy day.  Chinese are good savers because of the country’s relatively under-developed social security system.

This is about to change as Beijing tries to implement a nationwide health insurance system that will cover more than 96 per cent of the 1.35 billion population. A minimum pension has been created for rural retirees, who have had to rely on their families to provide for their retirement.

“Further reforms in China’s education and health care sectors will help reduce the precautionary savings of Chinese consumers and unleash their consumption potential,” says ANZ chief China economist Li-Gang Liu.

  1. Rising incomes

Ultimately, incomes are outstripping GDP growth in China by a significant margin. The rising income and purchasing power of Chinese consumers should be easily recognisable to Australians. You don’t need to look very far to see them at major tourist attractions throughout the country. They spend on average $800 per head in Australia, the highest of any country.

Average urban salaries rose 11.9 per cent in 2012 to 47,000 yuan or $8,000, according to data from the National Bureau of Statistics. The 2012 increases were the second lowest in the past decade. The highest increase was 18.5 per cent in 2007, when GDP increased a staggering 14.2 per cent.  

In 2013, wages of Chinese migrant workers increased 13.9 per cent from the previous year, nearly twice the growth rate of China’s GDP. For the country’s 269 million migrant workers, the average wage in 2013 was 2,609 yuan, or $480 a month. Though this may not seem like a terribly large sum of money, it is a far cry from the mystical $2 a day (Is a labour shortage looming in China? 21 February 2014).

  1. Rapid development of the e-commerce sector in China.

The intense media focus on the listing of Chinese e-commerce giant Alibaba in the US is a sign of the vitality of the industry, which is expected to be the world’s largest. China’s internet users are likely to hit 600 million in 2013 and e-commerce revenue grew at 70 per cent between 2009 and 2012.

E-commerce transactions in China are expected to grow to $580 billion in one year’s time, contributing to 10 per cent of total global retail transactions. By 2020, China’s e-commerce market is forecast to be larger than those of the US, UK, Japan Germany and France combined.

If you live in any major urban centres in China, you can expect goods that you ordered from the internet to be at your doorstep within a day. Chinese e-commerce companies are building a state of the art logistics network banking on the country’s rapidly improving infrastructure network.

At ANZ’s most conservative estimate, 45 per cent of Chinese urban households will earn between 100,000 yuan and 150,000 yuan ($17,000 and $26,000) by 2020. And the number of affluent households that makes up top 5 per cent income earners will increase threefold, creating an extra $1.1 trillion consumption demand.

The great re-balancing of the Chinese economy, which is likely to see the country become the world’s largest consumer market, will shape the global economy for many more years to come.

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