Factors Shaping China’s Consumer Market
Consumer goods market -- a key pillar of China's current economic strategy -- is deeply affected by various forces. EqualOcean depicts four factors that are likely to contribute to the next consumption upgrade.
Despite the new normal stage of China’s economy or the current trade turmoil with the US, consumer-facing companies should keen on this market in order to power their growth in the next decades. The article will discuss four factors underpinning the growth of the consumer market and the rise of Chinese consumer brands.
The macro context of China
In the 19th National Congress of the Communist Party of China (CPC) hold on October 2017, China’s leadership announced that the country has entered in a new stage of development, one of the priorities is to transform to a society that fosters innovation while improving people’s well-being. President Xi Jinping made the remarks that the government will improve systems and mechanisms for stimulating consumer spending and leverage the fundamental role of consumption in promoting economic growth.
With the ongoing trade turmoil with the United States and a slowdown in the economy, China is looking increasingly inward to domestic consumption to counter the downside pressure on the growth of manufacturing activity, industrial profits, car sales, exports and gross domestic product. In the quarterly economic meeting of China’s top leadership chaired by President Xi on July 30, 2019, the Politburo rejected the use of the large-scale stimulus employed in 2008 or the idea of easing restrictions on the housing market to boost activity. Instead, Xi urged officials to raise their “anxiety awareness” and to turn a “crisis into opportunity” by continuing targeted support and reliance on consumer spending.
The consumer market, from both the supply end and demand end, has been elevated to the level of national development strategy to bear the brunt of all the negative indicators.
Even with the economic headwinds that escalated by the trade war, China is still expected to overtake its rival and become the world's largest retail market in the coming three years. Based on a report from eMarketer, China currently has a 21.1% share of the world’s retail market, while the US has a 21.9% share, with an estimated retail sales growth rate doubled that of the US.
In addition to mixed private estimates, the National Bureau of Statistics of China announced that the total retail sales of consumer goods (TRSCG, a major indicator of retail market) reached CNY 19.5 trillion (USD 2.87 trillion) on the first half this year, with an increase rate of 8.4%, higher than previous projections. The TRSCG, which accounted for more than 43% of the gross domestic product (GDP) in the second quarter in 2019, is the stabilizer of China’s economic growth.
Policies supporting the domestic brand and consumption upgrade
China’s overseas consumption, or consumption outflow, has been forming an unstoppable trend. Though the country has entered the new normal in economic development, overseas consumption, however, continues to rise. According to the United Nations World Tourism Organization, Chinese outbound tourism expenditure surged from USD 13 billion in 2000 to USD 55 billion in 2010, to a staggering USD 258 billion in 2017. In 2018, the overseas consumption represented 2.2% of China’s GDP and 5% of TRSCG.
Encouraging overseas consumption is of great benefit to promoting the balance of international trade and reduce foreign trade frictions. However, from the current situation of China's economy, stable growth is imminent task. In order to open up new space for drivers of development, as early as March 2016, the 13th Five-Year Plan clearly points out that the government will actively work to encourage those who are used to shopping overseas to buy domestic products.
Policies are made intensively since 2018 to attract overseas consumption to domestic spending. Moreover, the government has been focused keenly to cut taxes for imported goods, raise purchasing quota for cross-border e-commerce platforms, and improve the distribution of duty-free shops across major tourist destination cities and develop international consumption centers.
More importantly, the return of overseas consumption urges the domestic consumer market to upgrade. To increase variety, improve quality and foster brands are crucial for the consumer market to promote the upgrading of product supply structure, assist the rise of the domestic market and brand amid the new normal.
The Party Central Committee and the State Council have attached great importance to brand development. On May 10, 2014, President Xi Jinping proposed to "promote the transformation from Made in China to Created in China, from China Speed to China Quality, and from Chinese Product to Chinese Brand". On April 24, 2017, the State Council approved the establishment of "China Brand Day“ on May 10th every year.
Another significant factor that affects the consumer market and brand is a slow variable – demographic shifts. From the present population distribution, we can infer the future structure in the next 10 to 30 years.
By applying the Leslie Model, a population forecasting model based on birth and death rate, we can deduct the demographic structure decade ahead. EqualOcean focused on three demographic trends that will contribute most to influence consumption in China.
First, China will become a deep aging society in two years.
According to Zhongtai Security, when a country or region has more than 7% of the population aged 65 or over, it means entering an aging society; reaching 14% is a deep aging society; exceeding 21% is a super-aging society.
China will become a deep aging society by 2021 and the population will continue greying by 2050, over one-third of the population are people over 60 years old.
Challenges coexist with opportunities. The Japanese government, a forerunner tackling with its demographic time bomb, is grabbing aging and technology changes to turn a negative into a positive and shedding lights on the consumption opportunities in the elders.
Second, less newborn and population shrinking.
To help address the aging issue in China, the universal two-child policy was proposed. Nonetheless, the incentives are not good enough to engineer another baby boom that happened three decades ago.
In 2018, newborns in China is 15.23 million, drastically decreased by 2 million than that of last year. The birth rate of 10.94%, hitting a record low since 1949.
Demographers estimate the babies born in 2019 will slump to 14 million, the downward trend of birthrate will sustain and the number of the newborn will fall under 13 million within five years.
Third, most skewed sex ratio generates more singles
The traditional preference for boys in China has encouraged selective abortions that resulted in a serious imbalance of sex at birth. The ratio peaked in 2004 when every 100 girls were born for 121 boys. Though declined after, the sex ratio stands over 1.1, high than the normal range from 1.02 to 1.07.
But that might not be the whole picture. Due to the one-child policy, some families who had a girl may hide from the authorities, one would be included later when she grows older. Therefore, the skewed sex ratio caused 30 to 40 million more male than female in marriage age, plus the millennials’ no-rush attitude towards marriage,
In 2017, the number of single people in China reached 200 million, tripled the population of the UK.
The consumer market is transforming rapidly through game-changing technologies since the Fourth Industrial Revolution. “To successfully navigate through the changes, a premium will be placed on innovation, the willingness of organizations to disrupt themselves, a quest for active collaboration and a commitment to advance inclusive growth strategies.”
According to a World Economic Forum Report on consumer markets, China will leapfrog from being a participant to a leader in technological innovation by three factors: 1) a strong technological infrastructure; 2) a supportive policy environment and active investments in leading-edge technologies; and 3) the transition of domestic companies from “copier” to “innovator”. While technologies will affect the consumption value chain from production to distributions, from retail and finally to consumption, we focus on the consumer end in this report. To see how technological applications will affect consumer behavior and their needs. (It turns out that future consumers will be “want it all”.)
This will create tremendous implications for companies by giving consumers more choice, convenience, experiences to new models of consumption. The new technologies will create powerful ecosystems around consumer data as well as major issues in such areas as privacy, inclusion and sustainability.