Chinese Consumers Will Change the Global Economy

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Chinese Consumers Will Change the Global Economy

As China’s massive population begins to spend more, the world will take notice.

Chinese Consumers Will Change the Global Economy

A customer shops for shoes at a mall in Hefei, Anhui province (March 10, 2015).

Credit: Reuters

The media is full of talk of China’s economic slowdown, as its GDP growth, in double figures for decades, now hovers at around 6-7 percent according to official figures. But while China’s economic slowdown is real, the growth of the Chinese consumer as a powerful force on the world stage shows little sign of abating and in fact will become more pronounced in the future. By 2020 there will be almost 400 million of what management consultants McKinsey call “mainstream consumers” – consumers with household incomes of $16,000 to $34,000 and therefore part of the “middle class.” It is these consumers that will shake the world.

China’s government is committed to transitioning the country’s economy from an investment-led to consumption-led. Beijing knows that the sources from which it has achieved such impressive growth in the last few decades – investment, cheap exports, and rural-to-urban migration – can no longer drive GDP growth as much as they once could and that it must find new sources of economic activity.

The good news for China’s policymakers is that consumer expenditures are growing strongly. “Because [China] is an immature market, even though GDP is slowing, consumer spending is still growing. It is outpacing GDP growth and is much stronger than consumer expenditure growth in developed economies,” Sarah Boumphrey of Euromonitor explained.

Surfing the Chinese Wave

According to Jeffrey Towson, co-author of The One Hour China Consumer Book: Five Short Stories That Explain the Brutal Fight for One Billion Consumers, the rapid rise in middle classes in China is “a new force” that should be considered independently from China’s general economic ascendance.

Euromonitor estimates that China will contribute more than any other country to global consumer expenditure growth from now until 2030. China is already the biggest export market for 43 countries; for comparison, the United States is the biggest for only 32 countries. Until recently, companies dreamed of “making it big” in America; now they are just as likely to gaze longingly at China’s massive market.

However, China’s consumer landscape is rapidly changing as consumers get richer. Chinese shoppers have turned away from pure “value purchases,” where price is the most important purchasing decision factor, and now strongly consider factors like brand, quality, and the status attached to the products they are buying. According to Towson, companies must appeal to “increasingly emotional [Chinese] consumers,” who can be “really fickle – more so than many other cultures.” While the Chinese consumer story has the potential to richly reward international businesses, they will have to contend with significant volatility which can lead to rapid changes of fortunes.

A bizarre example of this is the Bobbie Bear, which Towson and his co-author Jonathan Woetzel reference in their book. The Bobbie Bear is a bright purple teddy bear stuffed with surplus lavender from a farm in Tasmania, Australia, the retirement project of a man called Robert Ravens. Ravens’ business suddenly became inundated with orders – from 10 a month to 4,000 a month – after the Chinese model/actress Zhang Zingyu posted a photo of her bear online. Annual visitors to Ravens’ farm at one point exceeded 60,000. But then as quickly as sales rose, they fell as counterfeits of the bear sprung up in China.

The Bobbie Bear incident highlights the prevalence of counterfeits in China, which has eroded trust in domestically produced products. With the glut of fake products, health and safety is a massive concern after countless scandals. This affects the full gamut of products, from toys like Bobbie Bear, to food, over-the-counter drugs, and apparel. Towson says there is a lack of trust in “many domestic products for children. People are really concerned about health and safety. The food quality problem is not getting better.”

The Bobbie Bear also illustrates the power of Chinese celebrities to rapidly shape consumer demand. Another example of this is the effect Chinese basketball player Yao Ming had on the NBA’s fortunes after he joined the Houston Rockets in 2002. His appearance catapulted the success of the NBA in China – it signed contracts with 12 local Chinese TV stations in Yao’s first season – and increased the viewership of Houston Rockets games from 1 million to 30 million.

What Sectors Will Be Affected the Most?

China will have 345 million people over the age of 60 by 2030, an increase of over 80 percent since 2013. With an aging population, demand for healthcare services will soar. Consumer expenditures on health goods and medical services will see more growth than any other consumer sector from 2015 to 2030, according to Euromonitor. At the same time, China’s healthcare system is woefully unprepared. The Chinese government wants to increase healthcare spending to 7-7.5 percent of GDP by 2020, up from 5.6 percent in 2013. But Towson thinks Chinese “hospitals are way behind other developing economies like India” and “consumers aren’t waiting anymore… when people get cancer, they’re getting on planes to Singapore and London.”

Foreign companies will look to fill this gap and reap the financial rewards. Singapore’s Perennial Real Estate Holding had hardly touched healthcare in China until last year but now plans to build 20 to 40 healthcare hubs across China. Global pharmaceutical companies will also obtain much more of their profits from China and trust again plays a big part in driving this growth. “The pharmaceutical scandals will probably dwarf the food scandals,” says Towson, pointing out that recently “hundreds of thousands of kids got vaccines that turned out to be fake or sub-standard.” China will be the second-largest pharmaceutical market by 2020 and eventually the biggest.

It’s not just the older generation that are spending more on health. Chinese are increasingly turning to organic foods, which tend to be more expensive, due to the perception that they are healthier. “Many Chinese consumers have an innate distrust of processed foods and that, combined with the recent food scandals, has driven many consumers to seek out what they consider to be safer and healthier foods,” Euromonitor says in a research note. Yilei Wu, who runs a boutique fashion business in Shanghai and is an influential blogger on fashion trends in China, remarks, “Well-being and fitness is already a new trend. We’ve seen a lot of juice brands, new concepts. A lot more people [have] started to use bicycles. It wasn’t like this before – it was just associated with a cheaper form of transport. Yoga was introduced 10-15 years ago. Now everyone around me is doing yoga.”

Tourism and education will also be greatly affected. China’s outbound travel market will be twice as large as that of the United States in 2025. This trend is already having dramatic consequences. In May 2014, a group of 7,000 Chinese tourists boarded 86 planes in China, stayed in 26 hotels in Los Angeles, traveled around in 160 buses, and descended to numerous tourist sites en masse. Wu says of her friends in Shanghai, “Most people take at least one holiday a year to shop abroad. They go to Southeast Asia, Japan, Korea, Thailand, Vietnam, India… second most popular is then European and American countries, starting with London then Paris.”

Western universities are already gaining handsomely from rising Chinese incomes. Chinese students make up a third of international students in the United States. There are as many Chinese students taking masters courses in the U.K. as there are British students. Chinese students injected $9.8 billion into the U.S. economy in 2014-2015 according to the Institute of International Education.

Implications for International Trade

As China’s economy becomes indispensable to more countries and companies around the world, Chinese as a foreign language is soaring in popularity, and in unlikely places. The number of Israeli students studying Chinese has quintupled in the last four years. Around the world, 100 million non-Chinese now speak the language and in many countries kindergartens have begun to offer dual-language immersion.

Companies will pour resources into trying to understand the Chinese market and Chinese consumer preferences. As Towson puts it, “If you’re a hotel in London, I guarantee you there are blogs in Chinese reviewing you… China’s becoming the world’s largest entertainment market. Suddenly you have to try and figure out what they want to watch on TV.”

China’s huge consumer market means that the country will be able to set the terms of trade deals to its advantage. In 2013, Switzerland and China signed a far-reaching bilateral trade agreement that was hailed by politicians from both countries. Yet Swiss exports to China have hardly increased and the deal has since been criticized for failing to lower tariffs on Swiss watches, one of Switzerland’s main exports, while lowering tariffs on imports of Chinese manufactured goods.

China was able to drive a hard bargain, in no small part due to the bargaining power afforded by its massive consumer base. Gideon Rachman writes in his book Easternization: War and Peace in the Asian Century about political and economic power shifting eastwards: “It is economic might that allows nations to generate the military, diplomatic, and technological resources that translate into international political power.”

Get Ready for the Chinese Consumer

What if China’s economic slowdown becomes an economic crisis, for example as a result of its massive debt build up? China’s debt levels are worryingly high, at 247 percent of GDP in 2015, with comparisons made by investors such as George Soros between conditions there and in the United States before the financial crisis of 2008. A highly experienced China watcher who has reported on its economy for the last 40 years puts it this way: “A crisis is probably the number two likely scenario. Solving the problem is impossible… if they [the government] decide not to change the system they will continue to misappropriate capital. The middle class gets stunted. Their assets hit a ceiling.”

It’s undeniable that a serious economic crisis would dampen the Chinese consumer market. Some analysts predict a crisis but the truth is no one really knows whether this will happen – virtually no one saw the 2008 crisis coming, after all. Most analysts predict a slowdown rather than a crisis. Overall, it is clear that the growth of Chinese consumer expenditure is happening now and, bar a major crisis, it will continue to increase, even if China’s economy continues to slow. Beijing will also put enormous efforts into rebalancing China’s economy to be more consumption-led.

This will affect the world economy in many ways. In the past, “what was talked about at Chinese dinner tables or online didn’t matter,” says Towson, but now the effects of China’s consumer spending “is rippling over the world.”

Matthias Lomas is a consultant at market research agency Euromonitor International.This piece was written in his personal capacity.