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Growth in China’s Consumer Class Benefits Many Industries

By Stephen Green
Capital Group Economist 

Chinese consumers have become an especially potent force in the global economy over the past two decades. The country’s rapid economic growth, combined with a steady rise in worker salaries, has fueled an ongoing expansion of China’s middle and upper classes. Not surprisingly, greater levels of disposable income have translated into heightened spending on everything from the routine items of daily life to the affordable luxuries that are common throughout the developed world.

The effects of China’s burgeoning consumer culture are evident across a variety of industries. Wealthier households, for example, have an affinity for luxury goods, overseas travel and, of course, housing. New entrants to the middle class, meanwhile, are shelling out for soft drinks, smartphones and premium baby formula. Across all income levels, there’s an appreciation for quality-of-life services such as medical care, life insurance and wealth management.

I believe the purchasing power of Chinese consumers will be a vibrant source of demand for both domestic and foreign companies in coming years. The growth rate in the number of consumer households will edge back from its torrid pace of the recent past, but there is already an enormous consumer base that will expand for years to come.

Recently, the issue of global trade has generated attention — particularly the flareup of tensions between China and the U.S. Despite the aggressive tone of the rhetoric, I believe the economic impact at this point is likely to be modest. Though the outlook could change if frictions worsen, the underlying consumer appetite in China is unlikely to reverse course, and this trend should bode well for companies over the long term.

There has been a remarkable surge in the number of Chinese consumers.

I have studied the size and spending patterns of what I refer to as consumer households. These are families earning enough money to earmark some of it for traditional consumer goods, ranging from higher-quality foreign products to the small indulgences that signify entry to the middle class. Of China’s nearly 500 million households, roughly 260 million fall into the consumer category, with an additional 100 million or so likely to be added by 2030.

The growth of China’s consumer class is depicted in the chart below, which shows there were fewer than 17 million such households in 2000. The chart partitions the group into four segments, ranging from those just breaking into the middle class to those at the upper end of the income scale. Some of the most notable growth has come in the “emerging” and “moderate” categories, with annual household income equivalent to a range of $8,000 to $45,000 in the U.S. That might not sound like much, but the cost of living is significantly lower in China.

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In recent years, there’s been steady growth in the “comfortable” segment and the emergence of a “wealthy” cohort. There are roughly 14 million wealthy families today — a portion of them extremely affluent. Though small in total size, the number of these higher-income households has nearly tripled in the past two years and is expected to expand by a further 10 million within the next five years.

Beyond the 260 million consumer households described above, there are 217 million nonconsumer households: lower-income families that sometimes struggle to cover the bare necessities. In a measure of China’s economic progress, there were 386 million low-income households in 1995, and the number should decline further in coming years. Incomes are growing 4% to 5% annually across the country and at an even quicker pace for many low-income workers.

The growth of the middle class is fueling spending on a range of products.

The spending power of Chinese consumers is visibly on display in the skincare and cosmetics industry. Asian beauty products constitute a $60 billion market, and 80% of its growth in the next five years is expected to come from China. That’s due partly to the fact that Chinese consumers spend far less on these items than their counterparts in Japan and South Korea, which have similar beauty ideals and routines.

Skin care and cosmetics is an attractive business with strong growth potential, enviable customer loyalty and good cash flow. As their discretionary incomes rise, Chinese consumers tend to move up to premium products with brand names and stronger profit margins.

Similar dynamics are taking place in other industries, including alcoholic beverages and premium foods. Demand for highquality baby formula, for example, has risen as parents focus more attention on infant nutrition. High-end chocolates have also gained traction in China, with some newlyweds handing them out as gifts to wedding guests.

The transformation of China’s consumer class is also benefiting luxury goods makers as demand climbs for expensive jewelry, watches and handbags. The country’s growing wealth is evident in increasing air travel and foreign tourism. Outbound tourism has surged in recent years, creating more business for luggage manufacturers and online travel companies, not to mention aircraft makers and companies that sell related components.

These trends are driven partly by shifts in savings habits and borrowing patterns. The willingness of consumers to take on debt has risen notably, while personal savings rates have declined, especially among people in their 20s. Overall, the consumer mentality that has become more prevalent in China over the past two decades appears to be firmly rooted.

SPG

Stephen Green is an economist covering China. Based in Hong Kong, he has 13 years of investment industry experience and has been with Capital Group since 2014.

The above article originally appeared in the Spring 2018 issue of Quarterly Insights magazine.