China's consumer decade
The Chinese economy has been driven by a key theme in each of the last few decades. Exports was the theme for the 2000s. China started that decade as a WTO outsider and grew to become the world’s biggest exporter by the end of it. Public investment was the theme for the 2010s. In 2010, high speed trains were close to non-existent in China. Today, China owns two-thirds of the world’s high speed railways by length.
What will be the theme for the next decade? Exports lost momentum after the global financial crisis, and its share in China’s GDP has declined continuously since then. Investment growth slumped in 2018, when the government’s priority turned to constraining excess borrowing by local governments over a decade of public investment boom. Among China’s three main growth drivers – exports, investment and consumption – it seems that consumption is the only candidate left. There are some, though, who question whether high consumption growth can last.
Consumption boom: no end in sight yet
Consumption growth in China has been surprisingly stable. Despite the ups and downs in economic cycles and the structural slowdown since 2010, China’s consumption spending per person has grown eight per cent per year, in real terms, in each of the past four decades. As a result, China’s share of world consumption spending increased from two per cent in 1980 to 12 per cent in 2018 in dollar terms, or 14 per cent if adjusted for purchasing power differences. That puts China on track to become one of the world’s biggest consumer markets before the end of the coming decade. Indeed, it could reach or even surpass the size of the US and EU markets.
It is inevitable that consumption spending will have to slow at some point. Previous fast-developing East Asian economies all experienced sharp consumption slowdowns at various stages. Japan’s consumption growth halved in the mid- 1970s; Korea’s consumption growth fell sharply in the late-1990s. A quick glance at Chinese data makes some believe that China is now approaching that same point. Indeed, China’s real per capita GDP ($7,700 in 2011 US dollars) is already about the same as was Korea’s in the late-1980s and Japan’s in the mid-1970s.
However, this oversimplified analysis ignores two important factors. The first is the vast income and spending gaps across different regions. In the majority of Chinese cities, average annual income is between $4,000 and $5,000 today. That lags top-tier cities such as Shenzhen and Shanghai by about a decade. Outside the top-tier cities, income and living standards are improving rapidly from relatively low levels. Alongside this is the need for consumption upgrading.
The second factor is that Chinese households still save too much. They saved more than a third of their income in 2017, compared with just four per cent for the average OECD country (including Korea at seven per cent and Japan at three per cent). As a result, only 40 per cent of China’s gross output is used for household consumption, compared with 50 per cent in Korea and 55 per cent in Japan. This leaves great potential for Chinese households to consume more by reducing their savings for housing and retirement. Indeed, as a larger portion of the population retires, they will start to draw down on their savings. Furthermore, China’s younger generation are already exhibiting a preference for consuming more and saving less – a stark difference to their parents.
Slow consumption is still faster than most
Sharp consumption slowdowns are often caused by large economic shocks. Japan suffered from the first oil shock in the mid-1970s; Korea was hit by the Asian Financial Crisis in the 1990s. A consumption slowdown becomes much more likely if China runs into an economic or financial crisis. Fortunately, there are no signs of a hard landing today.
Further insurance comes from the fact that even if China’s consumption growth starts to slow, it will likely still grow faster than consumption elsewhere around the world. Therefore, China will continue to grow its share of the global consumer market. Again, we can compare with Japan. Its consumption growth started to slow in the 1970s but its global share peaked in the 1990s.
Changing consumption patterns
Regardless of how fast household consumption grows, the pattern of Chinese household spending will likely change substantially by 2030. There are three main themes that will drive this change.
1. The silent majority
A “silent majority” of Chinese consumers live in lower-tier cities and rural areas. They comprise over 60 per cent of China’s population but have been largely invisible to the consumer goods market. Walking into a community store in a small town, one will likely find the shelves stacked with low quality, locally branded products, most of which are unheard of by big city consumers.
This is changing. Harnessing the rapid advancement of social networks and mobile payment systems in recent years, online retailers will further tap into this enormous market. Retailers and consumer goods companies alike are devoting significant resources to studying the preferences of these consumers. What they want is often vastly different from what is being provided in top tier cities. For example, while Pinduoduo was only founded in 2015, by 2018, it had become China’s third-largest ecommerce platform. Specifically, it decided to target consumers in lower-tier cities and rural areas. One thing is clear: whoever is best able to tailor products to this silent majority will succeed in the next decade.
2. The rising “silver economy”
The second theme for the coming decade is China’s baby boomer generation. During China’s post-war baby boom, 320m babies were born. They received better education than previous generations, started working after China’s opening up in 1978, and stayed on the job during much of China’s rapid growth over the past four decades. In other words, they rode the tide of China’s growth and benefited from it. A 2010 survey suggested that they are wealthier than both the previous and later generations and most will retire during the next decade. Given China’s early retirement age (60 for men and 55 for women), most of this generation will live at least another 20 years after retirement. They will redefine China’s “silver economy”, the consumer market for the elderly.
Upon retirement, they will be rich, healthy, and full of time for leisure. They don’t need to save a lot for their children or spend a lot of time taking care of grandchildren – thanks to the one-child policy. In fact, they are unlikely to even live with their children. They will be the first generation in China to have both the time and money to enjoy life after retirement. The market for their leisure – travel, hobbies, wellness and entertainment – has significant potential. As the baby boomers grow older, their spending on medical bills and elderly care services will begin to rise. So while China’s services sector is still focused on serving children and the young working population, by the end of the next decade, retirees may become their biggest group of customers.
3. A greener consumer market
The Chinese government has made environmental protection a top priority for the coming decade. This year, top-tier cities in China are adopting mandatory trash sorting, which is expected to expand to lower tier cities later. Despite the hassle, this practice seems to have received broad support from Chinese urban residents. Once trash sorting becomes more widespread, producers will likely have to develop greener, recyclable products for Chinese consumers.
Travel and transportation – the most carbon-intensive activities for consumers – will become greener over the coming decade. While the number of cars on China’s roads will likely increase (passenger car ownership has just reached the level of Japan’s in the mid-1970s), emissions per vehicle will likely drop, thanks to new emission standards passed in 2019 and the broader use of new energy vehicles. The government’s goal is to raise NEVs’ share in car sales to 40 per cent by 2030. The increase in carbon-efficient rail travel will also help. This now accounts for a fifth of passenger travel.
Last but not least, China’s consumption patterns will likely turn less carbon-intensive over the coming decade. Chinese households are diverting more spending towards the services sector, which tends to have lower a carbon footprint than that of goods. Indeed, health and education have become the fastest growing categories of household spending in recent years. As spending on services continues to rise, this will naturally make consumption less carbon intensive. That is good news, not only for the average Chinese person but also for the Chinese economy as a whole.