The economy of Mainland China has been developing consistently and sustainably fast for three decades, fueled by three driving forces: exports, investment and consumption. The proof of its inherent strength is the fact that it held strong in the midst of the world financial crisis. According to China’s National Bureau of Statistics (NBS), the country’s gross domestic product (GDP) for 2009 reached $4.91 trillion, up by 8.7 percent from 2008, making China the second-largest economy after the U.S. But, despite that overall hardy growth and its number-two position in GDP, Ma Jiantang, the bureau’s commissioner, cautions that because of China’s huge population of 1.3 billion, its per capita GDP ranks lower than 100th place.
When the global economic recession slowed Chinese exports and the domestic financial markets became overly heated, the Chinese government placed more emphasis on domestic consumption to produce growth. In fact, domestic consumption will continue to be the major emphasis in the country’s next five-year development plan. According to a 2009 study conducted by McKinsey & Co., a New York–based consulting and research firm, China has the lowest consumption-to-GDP ratio among the major world economies, signifying huge potential for growth in consumption. Currently, consumer spending in China accounts for only 36 percent of its GDP, about half that of the United States and two-thirds that of Europe and Japan. But the manufacturing country is becoming a consuming country and, as a relevantly young consumer country, China has some catching up to do. The average Chinese citizen is still not wealthy, but the newly wealthy class and the middle class are emerging.
Consumption as Long-Term Goal
Domestic demand has always been the driving force behind China’s economic development. From 1979 to 2009, consumption contributed most to the country’s GDP growth in 19 of the 31 years, while exports were the prime contributor in three years and investment in nine years. Although the volume of exports increased rapidly during that time period, domestic retail sales of consumer goods were always far greater than exports. Even in the highest export year of 2008, the export volume was only 87 percent of total domestic retail sales.
In 2009, although the global retail industry fell sharply, China’s total retail sales of consumer goods reached $2 trillion, up 15.5 percent year on year. Excluding the inflation factor, the actual increase was 16.9 percent, the highest growth rate since 1986. Against the backdrop of an uncertain world economy, the Chinese government believes the most reliable way to grow its economy is by increasing domestic consumption.
Hope for the High End
The global financial crisis seriously affected the high-end consumer goods industry and the traditional markets in Europe and America are still sluggish, while the market focus has shifted to emerging markets in Asia, where there is more momentum. According to a study by Bain & Company, an international consulting firm headquartered in Boston, Massachusetts, luxury brands opened approximately 300 new stores in 2009, of which 15 percent were in China and 25 percent in other Asian countries. That same year, consumption of luxury goods in China reached $9.4 billion, 27.5 percent of the global share, according to the same study. By 2014, the Chinese luxury goods market is projected to reach $14.6 billion, giving it a dominant position in the luxury market. The study also reported that Chinese luxury consumers prefer the jewelry brands of Cartier, Tiffany and Chow Tai Fook, and the luxury brands of Giorgio Armani, Louis Vuitton, Chanel, Gucci and Prada.
China’s Ministry of Commerce reported that overall retail sales increased 7.5 percent year on year in 2009, based on the data from 4,000 large retail enterprises, and gold, silver and jewelry retail sales registered a growth of 12.2 percent, the second-highest growth rate after automobiles. In the first ten months of 2010, China’s gold, silver and jewelry consumption increased by 35.6 percent year on year, the highest growth rate among all commodity sectors, according to Huang Hai, director of the circulation policy consulting committee of the commerce ministry. The ministry also announced that gold, silver and jewelry consumption increased by 52 percent year on year in the month of November 2010, and by 16.4 percent from October to November 2010.
The consumption of high-end consumer goods is one important indicator of a consumer power and it is trending upward in China. When the country’s economy develops further, income levels will escalate and the consumption structure will improve. According to a survey by the World Luxury Association, a nonprofit international organization focused on luxury brands, high-end consumer goods consumption in China currently accounts for 25 percent of the global market, ranking second in the world.
In addition, 80 percent of the world’s high-end boutique brands have opened outlets in China and development has extended from first-tier cities to second- and third-tier cities. The top six areas for high-end boutique consumption in 2008 were Zhejiang, Shanxi and Jiangsu provinces, the Northeast China region and the cities of Shanghai and Beijing — and they account for 62.8 percent of the boutique market in China.
The demographics of the consumer groups also have expanded rapidly. In the high-end consumer goods category, 94 percent of the consumers are 25 to 39 years old and the number of consumers between 20 years and 30 years of age is 11 times as high as the number for Japan. The pool of high-end consumers consists of 13 million people whose annual income exceeds $36,000. Beyond that group, 170 million Chinese have purchased some high-end consumer goods, and the potential market is estimated at about 250 million people.
Consuming Big to Consuming Strong
China is a country that is trying to develop from “consuming big” — where total consumption is high but average per capita consumption is low — to “consuming strong,” where average per capita consumption becomes very high. In the durable consumer goods sector, at the close of 2008, every 100 urban Chinese households owned 8.83 vehicles, 94.65 washing machines, 93.63 refrigerators, 132.89 color televisions, 59.26 computers, 100.28 air conditioners and an astonishing 172.02 mobile phones. China has enjoyed a 14.5 percent average annual growth rate in total retail sales of consumer goods since 2000, compared to the 2.5 percent annual growth rate in the U.S. It is projected that China’s total retail sales in 2016 will exceed $5 trillion, at which point the country will overtake the U.S. as the largest consumer country in the world.
But while China has become a large consumer country, it is not yet considered a consumer power, because its per capita consumption, its consumption structure and its degree of green and scientific consumption still fall far short of that of developed countries. In each of the years from 2006 through 2009, China’s retail sales of consumer goods accounted for 69.1 percent, 69.3 percent, 72.8 percent and 79.9 percent of total consumption, respectively. In 2009, U.S. retail sales of consumer goods accounted for only 33.1 percent of the country’s total consumption; in Japan, 32.6 percent; in Germany, 21.3 percent and, in the U.K., 26.3 percent.
Pyramid of Wealth
The Chinese government has pledged to build a moderately prosperous society by 2020, with a goal of $3,000 per capita GDP. Developed regions, such as Shanghai, Beijing, Guangzhou, Shenzhen, Suzhou and Wenzhou, with a total population of more than 300 million, are likely to see per capita GDP in excess of $15,000. In recent years, middle-class Chinese consumers with annual incomes approaching $9,000 have been expanding from the first-tier cities like Shanghai and Beijing into the second-tier cities such as Wuhan, Hangzhou and Chongqing. The expanding middle class in these cities is transforming them into the economic engine of China. The nation’s middle class accounts for 20 percent of the country’s total population of 1.3 billion, more than 250 million people. That is more than the entire population of most other countries in the world.
China’s wealth pattern is like a pyramid, with the majority of the 1.3 billion people still not wealthy. But there is a 20 percent segment, representing the middle class, that is fast emerging and, on the tip of the pyramid, stands a very small percentage of the extremely rich. The growth in the number of Chinese millionaires has been driven by a rise in property prices, especially luxury property, the recovery of the stock market and the strong Chinese economy, according to Rupert Hoogewerf, founder of the Hurun Wealth Report, an annual report produced by his wealth research firm based in Shanghai, China. There is also a great deal of hidden wealth in the Chinese economy, suggesting, says Hoogewerf, “a hidden class of low-key rich, who keep their heads below the parapet.”
In April 2010, the Hurun Wealth Report found that there are 875,000 people holding more than $1.47 million in assets in Mainland China, an increase of 6.1 percent from 2009. Beijing is home to 151,000 millionaires, Guangdong, 145,000 and Shanghai, 122,000, accounting for 48 percent of the total. There are 55,000 Chinese who own $14.7 million in assets and that number rose by 7.8 percent from 2009. Within that group are 1,900 who own more than $147 million and 140 with $1.4 billion.
China’s average millionaire is younger — only 39 years old, 15 years younger than their counterparts outside China — and his wealth is growing more rapidly than his counterparts. The Huran Wealth Report also indicates that Chinese millionaires identify Cartier as the most preferred jewelry brand in first-tier cities, along with Bulgari. In second- and third-tier cities, they are fond of Montblanc also. Their favorite fashion brand in first-tier cities is Giorgio Armani, with Gucci and Boss the favorites in second- and third-tier cities. Meanwhile, half of the Chinese millionaires want to buy a boat and one-sixth of them a private airplane.
Ken K. C. Fong, president of the Jewellery Gallery Co., Ltd., has noticed that the wealthy class is getting more sophisticated and he predicts that more and more of them and their family members will buy big diamonds when there are more social functions to attend.
Traveling and Shopping
Compared with Europe, the U.S., Hong Kong and Macao, luxury brands cost 30 percent to 40 percent more in China. Tourist groups from China have such amazing buying power that there have been instances where a luxury shop had to close early for the day after the group left because the tourists had bought out everything. Also, psychologically, people spend more freely when traveling abroad. The number of Chinese tourists traveling abroad totaled 46 million in 2008 and the number is still expanding. Based on the widely accepted estimate that each tourist spends $1,000 overseas, the total overseas expenditure is $46 billion.
Data from the Hong Kong Tourism Board (HKTB) reveals that visitors from Mainland China spent around $6.2 billion in Hong Kong during the first half of 2010, with about $4.73 billion spent shopping. Estimates are that at least $3 billion of that amount was spent on jewelry, watches and luxury items. Hong Kong and Macau are free ports where the prices of luxury items are lower. The availability since 2002 of UnionPay, China’s only bankcard association, makes it very easy to use Chinese debit cards to buy goods and pay in the local currency, and the rising renminbi further boosts the overseas consumption. As a matter of fact, the jewelry and luxury stores in Hong Kong and Macau rely on the consumers from Mainland China to a great extent.
Investment Options
Chinese consumers’ investments in the stock market, real estate and automobiles greatly affect high-end boutique and jewelry business. China is among the most important stock markets in the world. When the stock market is bullish, people spend more freely. When the stock index goes south, people spend more conservatively. Traditionally, it is a dream for the Chinese to buy real estate when they improve their financial status. However, real estate prices in the major cities in China have rocketed so high because of speculation that they have created a large group of young to middle-aged people who are known as “mortgage slaves” because they have to spend the majority of their income on their mortgages, adversely affecting their consumption in other areas. As the largest automobile market in the world, China sold 13.79 million vehicles in 2009.
Sense of Security
Traditionally, the Chinese like to save — in October 2010, the total savings in Chinese financial institutions stood at $10.8 trillion — and they pay a great deal of attention to putting aside money for unpredictable diseases and accidents and to provide for the needs of children and parents. They like to have reserves to cope with the feeling of uncertainty in times of economic turmoil. That feeling of uncertainty is one of the biggest obstacles to increasing high-end consumption.
There are uncertainties in any economy — including asset bubbles, systemic financial risks, anticipation of inflation and uncertainty in the social security system — and these all produce anxiety among consumers and affect their decisions on where they spend and how much they save. The bottom line is high-end consumption will increase only when people feel financially and emotionally secure in the face of these uncertainties.
GDP Growth by Country
|
|
2005 |
2006 |
2007 |
2008 |
2009 |
2010e |
avg. 05-09 |
|
U.S. |
3.1% |
2.7% |
1.9% |
0.0% |
-2.6% |
2.8% |
1.0% |
|
India |
9.3% |
9.4% |
9.6% |
5.1% |
6.8% |
8.2% |
8.0% |
|
China |
11.3% |
12.7% |
14.2% |
9.6% |
9.1% |
10.3% |
11.4% |
|
Japan |
1.9% |
2.0% |
2.3% |
-1.2% |
-5.2% |
2.5% |
-0.1% |
|
E.U. |
2.1% |
3.3% |
3.0% |
0.5% |
-4.2% |
1.5% |
0.9% |
|
U.A.E |
13.1% |
13.0% |
6.2% |
7.4% |
-3.0% |
2.3% |
7.2% |
|
Brazil |
3.2% |
4.0% |
6.1% |
5.1% |
-0.2% |
6.8% |
3.6% |
Article from the Rapaport Magazine - February 2011. To subscribe click here.