China’s economy, boosted by a wave of growing middle class wealth, is undergoing a significant shift in consumption, driven by a new generation of young, prosperous and independent consumers. The country’s huge population and strong economic growth will make it the world’s powerhouse of middle class consumerism over the next two decades, and Australia, with its strong export links to China, is ideally poised to capitalise on this.
China’s economy is still heavily dependent on investment for growth: consumption only accounted for 50 per cent of GDP last year, significantly less than the United States at over 80 per cent, and even India which was over 70 per cent. However, the Chinese government is actively encouraging more consumers to spend. Consumption in China will account for 60 per cent of GDP by 2020; the equivalent of adding just under $1 trillion of consumer spending, even at today’s levels.
A massive push to urbanise will propel tens of millions of people, and billions of yuan, into the consumption equation. Spending by urban Chinese households will increase from 10 trillion yuan in 2012 to nearly 27 trillion yuan in 2022, according to McKinsey.
An HSBC Australia survey shows that a significant proportion of Australian SMEs are planning to expand into new countries or further grow their existing international operations in the next 12 months; with 49 per cent highlighting China as one of two top destinations for business activity and expansion.
Increasingly, we also see an increasing number of services-focused businesses poised to capitalise on China’s rapidly growing wealth amongst its middle class. HSBC forecasts rising demand within sectors such as food, tourism and education, among others, will provide real opportunities for Australian businesses, with figures showing a 25 per cent year-on-year increase of companies providing services to China.
Creative Instore Solutions, an Australian point of sale designer, is one such company to embrace these opportunities. The company has successfully evolved from its original manufacturing and export activities in China, to a services proposition which now includes procurement, quality control and sales offices on the ground, responding directly to the emerging need for more sophisticated retail environments across the country.
Status-conscious, upwardly mobile young people, with bold ambitions and a global mind set, are turning China toward a consumer-driven future. They are confident, independent, less price-sensitive and determined to display their worldliness through well-considered consumption. They are loyal to brands and prefer niche over mass market products.
Most of them are the only child in their families, and frequently the children of only children, giving rise to the so-called “4-2-1” dynamic: the savings of four grandparents and two parents are funnelled into the pocket of a single child.
This family model coupled with rising per capita household incomes are unleashing a wave of needs and aspirations that are getting people to rethink the ways they save and grow wealth. People are not only thinking about achieving or maintaining a certain quality of life, they are also aspiring for a good education for their children, both locally and overseas.
After a large number of years in decline, international student enrolments in Australia are now on the rise and the prospective rising salaries that accompany well-educated graduates will only serve to reinforce this trend. Looking to the future, with one child potentially supporting four people in their old age, financial security in retirement is a growing concern.
We believe that there are some areas that will present clear opportunities as China’s consumer-society develops, including tourism, luxury brands, and technology.
China already has the world’s largest number of overseas tourists and the largest proportion of tourist spending, and is still far from reaching its full potential. Chinese tourists made an estimated 98 million trips abroad last year, spending over US$120 billion on travel.
In Australia, Chinese tourist visits have increased by 110 per cent in the past four years and if we continue to attract the current share of visitors, and the more traditional tourism markets grow at their average rate, we anticipate that China will account for 1.8m visitors to Australia by 2020, up from 720,000 last year. This would see Chinese arrivals overtake New Zealand to be our single largest source of tourist numbers and account for 21 per cent of the total.
As the confidence of the new wave of Chinese tourists grows, the spending pattern is also changing. One of the factors driving the extraordinary growth in overseas tourism is the attraction of luxury brand shopping. Chinese consumers nowadays are developing a taste for the finer things in life. Western luxury brands have done particularly well in recent years because they are associated with a high quality of life and sophistication. Some people are also looking for the cache of products not available in the domestic market.
These rapidly emerging trends, driven by the rapid rise of middle class wealth, will profoundly shape China’s economy, but also have wider consequences, as Australia’s businesses increasingly position themselves to benefit from China’s push towards consumerism.