November 8th, 2011
Econintersect: Yuval Alsmon and Max Magni have an article at McKinsey Quarterly summarizing a research report on Chinese Consumers from McKinsey & Company. The research report, which covers results of an annual survey of consumers in the Middle Kingdom, states that China will become the world’s second largest consumer market with $4.8 trillion in sales. This will be double the spending in 2011. Currently the growth is being more and more driven by increasing tastes for luxury and less from a growing number of new consumers entering the market. First-time buyers have been driving the dramatic growth in consumer spending over the past decade, but contributed only 5% in 2011. It was 20% in 2010. Ten years ago most growth in many categories came from first-time buyers. Alsmon and Magni say the results reflect a “growing maturity” in certain product categories. Follow up:
Follow up:As fast as consumer spending has been growing, the overall economy in China has been growing even faster, driven by domestic investment. Michael Pettis (GEI Analysis) recently provided the following data table:
It is a popular assumption that exports are a larger component of China’s GDP than the data indicates.
If the decade-long trend in consumption to ever smaller contributions to GDP is to be reversed, it is likely that there must be a return to higher levels of first-time buyer activity. Otherwise, growth could only come with a growth in income inequality, a problem that has contributed to consumption and economic stagnation in the U.S.
There is another pathway to increasing consumption as a share of GDP. That would come if China GDP growth were to shrink significantly such that consumption would grow much more rapidly than GDP overall. Such a reduction in GDP growth could come from several sources:
- Shrinkage in GDP from inflation fighting efforts which have already slowed GDP growth to 8.5% in 2010 compared to 9.4% in 2009.
- Global economic malaise which could reduce China’s balance of payments surplus (lowered exports).
- Reduced domestic investment (which could result from extended inflation fighting actions).
The challenge for China will be to develop real income growth across large sections of their population. This is a sustainable pathway to increasing consumption as a share of GDP and in aiding the amelioration of global trade imbalances.