China’s free-spending youngsters offer GDP hopes beyond trade war as consumption base shifts to smaller cities, McKinsey says
- What McKinsey calls the “young free spenders” in smaller cities account for 60 per cent of consumption growth in 2018
- Companies and investors should broaden their focus from Beijing and Shanghai and adapt to capitalise on growth engine
Young, single Chinese living in smaller cities, most of them women, are fast becoming a driving force behind the country’s consumption growth story, offering clues to investors looking for opportunities beyond the US-China trade war tensions.
These “young free spenders” holding nine-to-five jobs in less glamorous lower-tier cities, such as Mianyang in the southwestern province of Sichuan, are boosting their purchases in all of the two dozens categories of goods – from fresh milk to skincare – without a worry about the future, according to results from a survey conducted by McKinsey & Co.
This group of consumers accounted for 60 per cent of China’s overall spending growth in 2018, even though they only represented a quarter of the survey population, McKinsey said in a report on Thursday. The majority of them are single working females in their 20s and early 30s who have plenty of time for entertainment and shopping even on weekdays, unlike their peers in bigger cities like Beijing and Shanghai, it added.
“What we can state quite confidently is that young free spenders in lower-tier cities will continue to be the consumption engine,” said Felix Poh, a partner at McKinsey who co-authored the report. “What’s absolutely critical to companies is to focus on young free spenders regardless of brand or category, while being careful on other [consumer] groups.”
The contrast is evident in the latest report, where about 10 per cent of the respondents reported a decrease in spending across the board, McKinsey said. These respondents, mostly in bigger cities, cut back most on products such as energy drinks, bottled water and Chinese liquor, it said.
This has implications for companies and investors, as most of them used to focus solely on consumers in metropolises like Beijing and Shanghai, Poh said. They need to adapt to capitalise on the rise of spending power in less-known regions, he added.
The number of households with annual disposable income of 140,000 to 300,000 yuan (US$20,000 to US$42,850) in tier-three and tier-four cities rose by 38 per cent annually between 2010 and 2018, faster than the 23 per cent compound growth in tier-one and tier-two cities, according to the McKinsey report.
These families now account for more than a third of the population in those smaller cities, nearly the proportion that formed the base in China’s bigger cities five years ago.
The market should wake up to the enormous opportunities in the consumption growth in China’s rural regions, said Kai Kong Chay, senior portfolio manager at Manulife Investment Management in Hong Kong.
“Consumers in tier-three and tier-four cities are behaving like what the tier-one and tier-two city people did five years ago,” he said in a media briefing on Wednesday. “The consumption story will have more legs to go.”