Much has been covered in the press regarding China over the past few years. The once seemingly unstoppable economic juggernaut has lost some momentum as growing pains have impacted the economy. An over-extension of credit, a retreat in global GDP growth rates and domestic reforms have all been factors in a material reduction in China’s economic growth rates. Is this the new, stagnant normal or a temporary, natural pause needed for continued growth? Research would indicate it is the latter.
According to the Boston Consulting Group, China’s consumer economy is expected to expand by 50% by 2020. The magnitude of this expansion is captured by the chart here.
What is driving this significant growth? According to BCG, there are three factors: the rise of the upper-middle class, a new generation of consumers and the growing role of e-commerce. The impact of these forces is shown in the chart here.
According to BCG, by 2020 the number of upper-middle-class and affluent households will double to 100 million and account for 30% of all urban households– compared with 17% today and only 7% in 2010. In addition, upper-middle-class and affluent households will account for 55% of Chinese urban consumption and 81% of its incremental growth over the next five years. Consumption among upper-middle-class and affluent households is growing at 17% per year and by 2020 will account for $1.5 trillion in incremental spending in urban China. That compares with a 5% growth rate among emerging-middle-class and middle-class consumers.
New Generation of Consumers
Consumption by young-generation Chinese consumers (those born in the 1980s and thereafter) is growing at a 14% annual rate—twice the pace of consumers older than 35. The share of total consumption by the young generation is projected to increase from 45% to 53% by 2020. Data shows that upper-middle-class consumers 35 and younger average 40% higher spending than last-generation consumers with similar incomes. This is consistent across a range of product categories.
BCG data shows in 2010, online transactions made up only 3% of total private consumption. The number of Chinese online shoppers has since nearly tripled, to 410 million, as has the amount that the average consumer spends online. Online channels now account for 15% of private consumption. Private online consumption is forecast to grow by 20% annually through 2020– compared with 6% annual growth in off-line retail sales. Thus, e-commerce will account for 42% of growth in private consumption as seen in the chart here.
As the data reflects, the Chinese economy is in the midst of a transition from an export-based system to one that is consumer driven. By way of reference, approximately 70% of US GDP is comprised of consumer consumption. Thus, the magnitude for continued growth in China can still be considered unprecedented.
Chart Source: https://www.bcgperspectives.com/content/articles/globalization-growth-new-china-playbook-young-affluent-e-savvy-consumers/