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McKinsey: Consumerism, but China?

Shotgunner51

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It's an article from last year but I would like to use it as a teaser to start discussing China's consumption, a key influencer on national, regional or even global economic growth.

@AndrewJin @terranMarine @jkroo @powastick

http://www.mckinsey.com/business-fu...consumers-will-continue-to-surprise-the-world

Why China’s consumers will continue to surprise the world

By Jeffrey Towson and Jonathan Woetzel

Fears about China’s slowing economy are overblown, authors Jeffrey Towson and Jonathan Woetzel argue in this adapted excerpt from the follow-up to their The One Hour China Book.

China has an awesome consumer story. Yet lately you can’t pick up a newspaper, go online, or watch television without hearing continual moaning about the country’s slowing economic growth and the need for “rebalancing.” The reality is that Chinese consumers are going to continue to increase in wealth and complexity. And if you’re worried the country’s economic importance is declining, you’re probably looking at its performance the wrong way.

Don’t worry about consumer spending as a percentage of GDP

As in most developing Asian economies, China’s early growth was based on savings, investment, and exports. You get your population to save, move to the cities, work in factories, and make stuff. This is sold, and cash is brought back home for investment. Plus, you get some foreign investment as well. This process enabled China to develop its infrastructure largely with its own cash. That, by the way, is not the norm. Developing economies typically borrow from foreigners and then default—for example, American states such as Mississippi and Florida were chronic defaulters on foreign debt as they initially developed.

One of the downsides of this investment-first approach is that it makes consumption look small and often like it’s shrinking. Chinese consumption decreased from approximately 51 percent of gross domestic product in 1985 to 43 percent in 1995, 38 percent in 2005, and 34 percent in 2013. By comparison, consumption is around 61 percent in Japan and about 68 percent in the United States. In fact, China’s small and decreasing consumption percentage is one reason why people keep talking about “rebalancing”—the need for the economy to become driven more by consumer spending than investment and exports.

Our position? Don’t worry about this stuff.

First, from 2000 to 2010, the size of the Chinese economy more than doubled.1 So consumption grew from around $650 billion to almost $1.4 trillion. Regardless of its relative percentage of GDP, China’s consumption has been growing faster than just about any other country’s in absolute terms. Second, just getting consumer spending back to 43 percent of GDP, the level in 1995, would have a huge impact on “rebalancing.” It would also create the largest consumer market in the world. Third, most of these numbers are wildly inaccurate. Consumer spending is nearly impossible to measure in such a big, complicated economy. Combining a vague number with two other big vague numbers (investment and net exports) is very fuzzy math. Until economists start putting uncertainty estimates on their China calculations, relative percentages aren’t worth paying much attention to.

Household income is what matters, and it’s great
The number you really want to keep in mind is household income. You can’t have consumption without income. And here’s where it gets really awesome. China’s household income is huge. It is now likely above $5 trillion a year. Plus, lots of income is unreported, so this is really the lower boundary for true household income. Developing economies—especially the BRIC nations of Brazil, Russia, India, and China—are frequently grouped together, but Chinese consumers dwarf all the others in terms of household income (Exhibit 1).
Exhibit 1
China’s total household income dwarfs other emerging markets.
SVGZ_OneHourChina_ex1_REVISED.ashx

Rising discretionary spending is the exciting part

Discretionary spending is buying the stuff you like but don’t need. Or you only sort of need. And, fortunately, people seem to have an endless appetite for everything from entertainment to skiing to caffe lattes. Chinese citizens are now moving beyond being able to only afford the basics of life, and their discretionary spending is taking off. Growth in spending on annual discretionary categories in China is forecast to exceed 7 percent between 2010 and 2020, and growth of 6 to 7 percent annually is expected in a second category of “seminecessities.” Both of these categories are growing faster than spending on actual necessities, which are expected to grow around 5 percent a year, about the same as expected GDP growth (Exhibit 2).
Exhibit 2
Discretionary categories are showing the fastest growth.
SVGZ_OneHourChina_ex2.ashx

Finally, an important related issue is the Chinese tradition of saving. If we compare spending and saving rates across the emerging markets, we see a spike in savings in China. That spike is fairly understandable. First, it’s cultural. Second, they are precautionary savings—no social safety net means if you get sick, it’s all on you. Third, Chinese savings are not unique. Japan, Korea, and Taiwan all hit 30-percent-plus savings rates in their early development. And fourth, without much of a consumer-finance system, it’s tough to use debt to hit truly spectacular consumption levels. After all, a vacation home or car may cost the equivalent of a year’s income.


That’s our rant on China’s macro consumer situation. Basically, we believe it remains a great story. It may be volatile. It’s also somewhat unpredictable. But you just don’t get a consumer growth story this good anywhere else.

This is an edited excerpt from The One Hour China Consumer Book: Five Short Stories That Explain the Brutal Fight for One Billion Chinese Consumers (Towson Group, 2015). For more details about the book, visit onehourchina.com.

About the author(s)

Jeffrey Towson
is a managing partner of the investment firm Towson Capital, and Jonathan Woetzel is a director in McKinsey’s Shanghai office. They are both professors at Peking University’s Guanghua School of Management in Beijing.
 
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very true. Household income and disposable income are more important factors than consumer spending. Consumer spending in the form of borrowing money to buy medium priced products is not a healthy sign of an economy imo. The ability to be able to buy things when you want (disposable income) is more important.
 
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Imported products and domestic made products consumptions keep rising with many factors. The structure of economy keep changing in macro and micro economy sections.

In 2008 when I still research the macroeconomics I got a hint and a macroeconomics model for China's economy increasing pattern. At that time, the model predicts the economy entities will continue high growth rates(average more than 5%) at least to 2028 for the macroeconomics factors, the population, the structure, the social insurance etc.

The consumption potential of China just awaken less than 60% and the economy structure transformation and social insurance will leave more rooms for the growth especially in consumption sectors.

From figures I got from import and export goods and services, the structure do keep changing these years and the lower end industries are moving outside and yes you can see more complex goods exported to all the world.

We donot like debt so the savings and properties keep increasing by household observations. That's a positive signal but we need more measures to strengthen consumptions. We do have many consumption capable economists and we will finally deal with it.

Surprising the world? No, we just need to give ourselves a relaxation.:coffee:
 
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Some photos first, one of the many shopping malls in my city which is Central China.
Wuhan, the prime investment destination of retails....

Full competition here, IKEA mall from Sweden, AEON from Japan, Shui On from HK, Wanda from Dalian ...... (long list) plus our numerous local malls from Wuhan....o_O

First one from Sweden....my parents' favourite, cheap Swedish fast food, :rofl:
By subway half an hour from my home
4F72CCF1-A696-42E9-A42A-7235E48B96FD.jpg


Second one from Hong Kong, very very Shanghai Xintiandi style (same company):argh:
By subway half an hour....(from this one to Ikea 50min)
7384289978_cd4f5194b5_b.jpg


Third one is local, the most profitable one for the moment
Only 1km from my housing, always walk there, traffic jams around headache!:frown:
Oldest since 1959,has to be upgraded for multiple times to compete with the other malls.
Actually 3 old malls plus one new mall integrated as one!
(only one can be seen from this photo)
093348u5ma827ywwm4d5gh 2.jpg


Then my favourite one, one of the many Wanda projects here from Dalian of Northeast China:oops:
A pedestrian street + theatre + indoor cinema park + hotels
By subway 40min (across Yangtze River)
093347k6x44t669l1tat0x.jpg


Haha, these malls....serving one million higher education students who are currently studying in this region
Will never go there, like a new city to me...the other end of this city, full of young college immature...
Can never hear local dialect....:angry:
093348b6j36oh25udp3b9x.jpg


Well well, some old malls here....not appeal to me:disagree:
093142carnjl5h510noijg.jpg


dunno why this region has the one of the most expensive housing here....
Some malls, but kind of small:wave:
2km from my home, sometimes walk there to jog around the lakes
093141geign0ifgwwwzzno.jpg


New one in the making....:help:
3km from my home
204047s12aya1zyyr9ayhd.jpg


Gonna sleep, will read OP in details tomorrow. See you!
:sleep:
 
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