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China’s Consumption Set To Surge

International | Oct 13 2015

-Reforms to improve consumption
-Need to re-balance global economy
-New opportunities in China for retailers


By Eva Brocklehurst

The rise of China's consumer continues apace. Nevertheless, at 38% of GDP, consumption remains well below the rates seen in other economies. Over the next 15 years, ANZ Bank analysts expect the consumption rate will rapidly approach global norms, even with a slowing of China's actual GDP growth rate.

Why? A range of reforms are being implemented to increase household incomes and lower precautionary savings. These include medical insurance and pensions, labour law amendments and land reform, all of which should provide greater capacity for the average Chinese to spend.

The analysts expect the growing urban middle class will more than double its spending over the next 15 years and lift consumption as a portion of GDP to 50%. They calculate this would mean China's consumption by 2030 would exceed today's US GDP and signal the most significant change in global consumption patterns since the rise of the US middle class at the beginning of the 20th Century.

China's consumption rate is unusually low because its economy has been characterised by high rates of investment and saving. Consumption in most economies ranges between 50% and 70% of GDP. The analysts divide consumption trends into three phases.

Initially, consumption share is high because most household income is spent on necessities such as food, basic clothing and shelter. The share then falls as a rising portion of a country's GDP is devoted to investment for industrialisation. The third phase is when the necessary infrastructure for industrialisation is in place and incomes reach a level where people can afford luxury goods and services.

In China's case the infrastructure build is still in train but is expected to slow. The analysts note per capita income is now at a tipping point of US$10,000 and consumption should rise steeply. In fact, they contend it will need to do so if the country's economy is to avoid a crisis over coming decades. If investment is reduced consumption will need to take over to support growth, or the economy risks falling into recession.

Hence, the analysts observe the raft of reforms being undertaken are necessary to reduce the level of China's precautionary savings – a tendency for households to save for an unsupported retirement or for medical expenses. Pension reforms are being undertaken and there is a plan to deepen the medical insurance schemes in this regard.

Land and labour law reforms are being undertaken to lift the more impoverished regions of China, while financial system reforms should improve the household sector's access to credit and financial management products. The analysts expect affluent consumers in cities like Shanghai will adopt Hong Kong's pattern of higher expenditure on electronics, jewellery, cars, education, medical services and packaged tours.

There are risks to the assumptions, none the least being delays in liberalising the financial system or implementing reforms. On a positive aspect, growth in Chinese consumption could help re-balance the global economy, especially if it reduces the reliance upon the US consumer as the final source of global demand. The analysts note the US economy has absorbed much of China's excess savings, contributing to its large current account deficits.

Negatives? This may mean lower growth in China and fewer exports will mean some emerging Asian economies, which are currently exporting components to China for assembly, may have to develop new growth strategies. In all, global financial stability is expected to be enhanced by the rise of the Chinese consumer with new opportunities for retailers emerging globally, the analysts maintain.

So, what are China's middle class buying? The country has already become the world's largest market for some luxury cars as well as watches and high-end fashion. Consumption abroad has also risen sharply with the analysts noting that spending on tourism hit a record US$164.8m last year.

Opportunities for Australia include education, tourism and services. The analysts expect the changes may present some challenges for Australia, in particular, because the move away from investment-led growth means reduced demand for commodities.

Australia's commodities will still be needed for China's growing housing, car and energy markets but Australia will need to adapt to take full advantage of the emerging opportunities in the services sector. The analysts expect Australia's exports to China to double by 2030 but the road ahead may be a bumpy one.

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