What Are the Global Economic Effects?
A bullish view of Chinese product consumption has emerged on the back of several factors and observations. China’s per capital income has been rising at 11% annually since 2010. The shift from low-paying manufacturing jobs to better-paying opportunities in the technology and service industries has boosted spending power and product consumer sentiment.
The rich are getting wealthier too. According to the 2016 China Private Wealth Report, the number of high net worth individuals in the country is nine times what it was ten years ago. It has emerged as a country of many firsts, and is in a neck-and-neck race with the United States for the title of the world’s highest number of billionaires as well as its largest retail market.
East is the New West
For a very long time, what was popular in America became desirable in the rest of the world. The scenario has been disrupted by the growth of China’s consumer economy as multinationals have turned their focus eastward. More of their R&D is now informed by what Chinese product consumers like and prefer, which means that Chinese taste has started influencing tastes all over the globe. The government has moved to inspire desire and consumption and benefited in the form of economic growth. To sustain this boom, the Chinese government is relying on the population to increase the digital shopping trend.
Three Key Drivers of China’s Consumer Market
Individuals born in the 1980s onwards, known as the ‘younger generation’ in China, are steadily becoming an influential force in the country’s consumer market. Consumption by this segment of customers is growing at a rate of 14% annually, twice that of consumers over 35 years of age. Surveys indicate that the younger generation does not hold back from spending across a range of product categories. They are also more brand-aware and brand-conscious than older generations, as well as travel twice as much.
- Rise of upper middle-class consumers
China’s middle-class population has grown steadily over the years. This section of consumers is also driving the growth of the consumer market. It is forecasted that upper middle class and wealthy households will account for 55% of urban consumption and be responsible for 81% of its growth over the next five years. During the same time, more of the low-income households today will move up to the lower middle-class segment. The middle class and emerging middle class are expected to boost consumption across many categories, especially fast-moving consumer goods.
- Proliferation of E-commerce
The accelerated rate of e-commerce adoption in the country is only set to increase in the future. Since 2010, the number of Chinese online shoppers has tripled to 410 million, and online channels make up 15% of private consumption with the number expected to rise by 20% within 2020. Much of the online sales are occurring on mobile phones and predicted to continue their upward momentum. One of the reasons for the massive adoption of online retail channels is the access to a larger variety and better prices than what is available in physical stores. Ecommerce has enabled companies to address their distribution challenges and expand their reach in ways not possible before.
Chinese consumer behavior seems to be a lot closer to American consumerism where desiring the ‘good life’ is widely acceptable and higher levels of consumption are deemed beneficial to consumers. It contrasts with European consumerism which is less excessive and more restrained. This is seen in the higher levels of brand awareness among Chinese consumers. For instance, even those who may not have the financial resources to purchase a product from a high-end brand understand the prestige associated with it as well as brands that are less or more prestigious.
Impact on Sectors
China’s influence on global economics is extensively documented. As the world’s largest consumer of key commodities such as steel, iron ore, copper, and lead, slowing demand in China can adversely impact several commodity-exporting countries, including Indonesia, Australia, Peru, South Africa and Brazil. The resulting fall in commodity prices can create deflationary pressures in the rest of the globe.
China is responsible for 10% of global trade. A fall in demand for imports is bound to hit countries that rely on trade with China, and also cascade down to countries that don’t have close trade relations with China. Companies that sell products in China, such as Microsoft and Apple, are directly exposed and impacted; but companies with indirect exposure also face the risk of lower profits owing to a less than conducive trade and economic environment in China.
Tourism: According to the most recent study by the World Tourism Organization, China is the world’s top spender in global tourism, and accounts for 21% of the world’s international tourism spending. China has become an important source market for not just destinations in Asia and the Pacific, but also for destinations in other regions across the globe which has attracted interest from Chinese travelers. For the record, Europe is the world’s most visited region, followed by Asia and the Pacific, the Americas, Africa and the Middle East.
Most Chinese nationals embark on at least one holiday to shop abroad, visiting Southeast Asia, Vietnam, Thailand, India, Korea, Japan, and American and European countries, notably London and Paris.
Education: In 2016, over 500,000 Chinese students studied overseas, with Western universities being the beneficiaries of the trend. The number is expected to peak to 700,000-800,000 over the next five years. This growth will be divided among Chinese students pursuing primary and secondary education, colleges and universities, postgraduate education, and skills training or vocational education. According to the Institute of International Education, between 2014-2015, Chinese students pumped $9.8 billion into the U.S economy.
Art and luxury: Affluent Chinese product consumers appear to have a no-holds-barred approach to spending exorbitant sums on luxurious goods from reputable brands or investing in items of significant value which they believe can generate exponentially high returns in the future. One example is the fast-expanding Chinese luxury market driven by the entry of conglomerates such as LVMH, Pernod Ricard, and Richemont. The impact on international trade – specifically Western trade – can be witnessed in the increasing reliance of New York’s Fifth Avenue and London’s Bond Street on Chinese tourist spending.
The art market has also benefited from the patronage of billionaire Chinese buyers. In 2016, China beat the United States to emerge as the world’s largest art market. According to online art price database, China accounted for 38 percent of the world’s art business, totaling US$4.8 billion. A significant portion of global auction sales at Christie’s and Sotheby’s comes from Asian buyers, which has led to the opening of Chinese branches of these leading auction houses.
In the luxury and art world China’s increased purchasing power is leading to cultural adjustments and adaptations in areas where Western culture and sensibilities have dominated.
Mobile phone market: Chinese consumers spend at least two hours each day on their mobile phones. According to the Ministry of Industry and Information Technology the country recorded about 780 million smartphone activations in 2015, representing a penetration of nearly 60 percent of the population. Apple iPhones made up about 17 percent of those mobile phones – that’s 131 million of the devices. That would make China the world’s largest market for smartphone ownership leaving the United States to claim the second spot at an estimated 100 million iPhone users.
Chinese product consumers’ craving for electronic gadgets has spawned the likes of Xiaomi, Vivo and Oppo. While the development is good news for Chinese consumers, who now enjoy a wider mobile phone selection, it is a threat to Indian smartphone brands who have seen their market share dip at a dramatic pace. In the first quarter of 2014 Chinese smartphone brands accounted for 7 percent of India’s mobile phone market share. By the first quarter of 2017 they consolidated to a whopping 51 percent. Chinese smartphone makers have spent millions on promotions leveraging tools with mass market appeal such as cricket (India’s most watched sport) and Bollywood (India’s very own Hollywood).
The expectation from China’s new product consumer culture is high. The political establishment rolled back taxes this year by $55 billion to boost consumer spending. The government has also allowed a reasonable appreciation of the Chinese currency. Given the trends in consumer spending, and the encouraging push from the government, this may just be the beginning of what is to come.
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