The Chinese consumer takes centre stage
Ha Jiming says rising income, demographic changes and a weaker export sector are giving Chinese consumers a bigger role in economic growth. This spells opportunity for many
For the past three decades, China has been known as the "world's factory" for its low labour costs and manufacturing capabilities. The "Made in China" label can be seen on different products, in particular toys, clothing and footwear. This has been a major driving force of economic growth in China. As of the end of last year, according to the National Bureau of Statistics, the manufacturing sector contributed over 32 per cent to China's gross domestic product.
Underpinning the low-cost comparative advantage of manufacturing enterprises was the abundant low-cost labour that migrated from rural areas and the specialised industrial clusters that took shape in the coastal regions.
However, after 30 years of fast growth, the "Made in China" model is becoming unsustainable. With rising labour costs and an increasingly unstable labour supply, low-end manufacturing enterprises in China have begun to relocate to low- income countries such as Indonesia, Vietnam and Cambodia in the past few years. International brands such as Nike, Coach and Muji have all announced plans to scale back the manufacturing base or share of orders processed in China.
The average urban minimum wage in China has gone up every year since 2010 and in the first half of this year, 16 regions and provinces raised the minimum wage further by an average of 19.7 per cent. According to the National Bureau of Statistics, in the first half of 2012, Chinese urban residents' real per capita disposable income grew by 9.7 per cent, while rural residents' real per capita cash income grew by 12.4 per cent, both outpacing the real GDP growth of 7.8 per cent in the same period.
With such income growth comes the concept of "Made for China". Chinese households are spending more not only on better food, brand-name clothing, luxury cars and other high-end consumer goods, but also on services such as telecommunication, travel, entertainment, education, health care and insurance.
It means there will be much room for development and investment in sectors such as agricultural products, safe food and drink, mid- and high-end consumables, health care, financial services, tourism and cultural recreation. Household registration reform and an improved urban environment will also support the development of the property industry in the longer term.
Chinese consumers have already emerged as major customers for luxury-goods companies. Company data shows that, on average, sales revenue of nine international luxury brands on the mainland and in Hong Kong and Taiwan accounts for 20 per cent of their global sales. This share is likely to increase as household income continues to grow.
Chinese are eating less grain but more meat as their income grows. Livestock consumes much more grain than people so, as people eat more meat, the indirect consumption of agricultural products increases as well. There is also a demand for "quality" food and drink. The prices of the three leading alcoholic drinks in China (Maotai, Wuliangye and Luzhou Laojiao) have more than doubled since the beginning of this century.
Services so far remain a small part of overall consumption in China, representing a mere 20 per cent of total consumption, compared to more than two-thirds in the US. For example, there are abundant opportunities in the insurance sector due to the lack of a national social welfare system, an ageing population and fast growth of family wealth. With total premiums ranked sixth worldwide, China is now the world's fastest-growing insurance market. Medical service expenditure is another area set for significant growth due to an ageing population and higher living standards.
The emergence of the "Made for China" theme does not mean consumer goods will no longer be "Made in China". China's manufacturing industry still maintains some competitive advantages over other lower-income countries, including better infrastructure, a more complete manufacturing chain and larger domestic market. Many formerly export-oriented businesses are now more focused on domestic consumption and virtually all services are domestically provided.
It is important to recognise that economic transformation in China is vital after two decades of rapid growth driven by exports and investment, which has led to the current imbalanced and unsustainable growth model.
Although demographic factors could influence the shift in the growth model, proactive policy initiatives should be adopted with the intention to accelerate the economic transformation. Policies need to reduce the still-widening income gap, develop consumer credit, rationalise public expenditure and tax policies, and require state-owned enterprises to increase dividend payouts.
The household registration () reform will be strategically important to the nation's long-term economic development. The quality of urbanisation and consumption growth have been undermined by this registration system. Data from the National Bureau of Statistics shows that over half the total population now lives in urban areas, but as Vice-Premier Li Keqiang said recently, the number of people holding urban household registration records (and therefore eligible for urban social welfare) amounts to only 35 per cent of the population. If this system is abolished, enormous suppressed consumption demand will be released and service industry growth will also be accelerated.
The Chinese government is already implementing a slew of measures to promote consumption. It plans to build 36 million apartment units by 2015 under a programme for low-income housing - tremendous consumption demand would be unleashed if those who currently live in a dorm move to their own apartment. The China Securities Regulatory Commission has also required listed companies to pay more dividends to shareholders. Finally, better developed consumer credit could potentially provide a great stimulus to consumption.
