Across The Border

Eager to spend millennials are new engines of China’s economy

Higher income growth in smaller cities and a young demographic willing to spend have helped to boost domestic consumption, with beer, dairy and home appliances companies tipped to be the biggest winners

PUBLISHED : Friday, 13 October, 2017, 4:52pm
UPDATED : Friday, 13 October, 2017, 10:53pm

China’s consumption expenditure is set to receive a substantial boost from millennials who are willing to spend, with beer, dairy and home appliances sellers seen as the biggest winners from this trend, according to market observers.

“Consumers born after the 1980s have become the major buying force in China,” according to a Credit Suisse report written by analysts led by Charlie Chen. “They have a much higher willingness to spend versus the older generation, as evidenced by a Nielsen consumer confidence survey and high growth in credit card loan balances.”

Chen said the mainland consumer market growth is also supported by increasing consumption of higher priced products in tier three and tier four cities such as Yantai and Lanzhou and Shouguang and Zaoyang. Growth in personal income and consumer expenditure in these markets has been outpacing that of tier one and two cities such as Beijing, Shanghai, Shenzhen and Chengdu for a while. The gap between these markets has sharply widened since January.

“Taking 70 per cent of the Chinese retail market, the accelerating growth in lower-tier markets will become a major driver of China’s consumer spending,” Chen said.

The biggest winners from this trend, Chen predicts, will be the staples companies, because the Chinese staples market is dominated by local firms and they will enjoy the full benefit of the trend in moving towards more expensive premium products.

“Dairy, beer and home appliances are best positioned to leverage this trend because of the strong consumer need for premium products, strong product research and development capability of a few dominating players and easing competition because of leading players strategically shifting away from price wars,” Chen said.

He recommends investors keep an eye on the A shares in these sectors, such as China Resources Beer (Holdings), the country’s biggest brewer and owner of the Snow beer brand, as well as China Mengniu Dairy, the country’s second-largest dairy.

WH Group, which is the world’s largest pork producer, as well as home appliance company Qingdao Haier, are going to benefit from this consumption trend, Chen added.

The analyst however warned investors to avoid instant noodles seller Tingyi and Tsingtao Brewery as their valuations are high.

Chinese home appliance firm Gome Retail Holdings said it was confident of riding this trend. The company plans to open 500 stores in the next five years, particularly in lower-tier markets, according to Victor Fang Wei, chief financial officer.

Gome reported a 7.8 per cent rise in sales volume and a 23 per cent rise in gross merchandise volume in its interim report for the first half of this financial year.

Data show China’s strong economic growth is now driven more by expenditure than by investment.

The World Bank last week revised up the growth estimate of Chinese gross domestic product by 0.2 percentage points to 6.7 per cent this year. The upgrade is because the economy has shrugged off its reliance on external demand and investment and has become more driven by domestic consumption, with greater growth expected in consumption expenditure than in investment.

Such a shift to consumption from investment is likely to continue to be a major national policy to be announced at the 19th National Congress in Beijing starting next week, said Will Leung Chun-fai, head of investment strategy at Standard Chartered.

China’s consumer confidence index last month hit a new high since 2000 of about 115 after a rally of 16 months, suggesting China’s consumption is on track to remain high, according to Bloomberg.

In fact, according to the National Bureau of Statistics, the total retail sales of consumer goods in August reached 3.03 trillion yuan (US$460.3 billion), up 10.1 per cent from the previous month.

The accumulated growth rate from January to August has also kept its pace at 10.4 per cent, a record high unchanged for three consecutive months, according to the bureau.

In contrast, the accumulated growth of fixed-asset investment from January to August was only 7.8 per cent, 0.5 per cent lower than that from January to July, and a new low since January 2002.

In July, Yan Pengcheng, director of Policy Research Office at the National Development and Reform Commission, said consumption has become an increasingly important driver of economic growth under the national policy of consumption expansion.

“The contribution of consumption expenditure to overall economic growth has risen consecutively for the last three years from 48.8 per cent to 64.6 per cent, all higher than that of investment expenditure,” Yan said.

“[Consumption expenditure] in the first half of the year stood at 63.4 per cent, 30.7 per cent higher than that of investment expenditure.”

The contribution of consumption expenditure to overall economic growth in the second half of the year will stand at about 65 per cent, according to a report by Aijian Securities in Shanghai released last month.