Chinese Consumers Still Plan to Spend Big in 2016

30 Jun,2016

China’s slowdown isn’t keeping the country’s shoppers from spending. In fact, consumer sentiment is strong and many plan to spend even more this year than last.The Boston Consulting Group’s (BCG) latest consumer sentiment survey, out Sunday, found that three quarters of Chinese consumers will maintain or increase the spending this year, down just a touch from the 81% who said so in 2015.

Consumers’ ability and willingness to spend more are the two major drivers of consumption growth. The ability to spend is still strong as more than 40 percent ofChinese urban households are squarely in the middle class and affluent category. Willingness to spend remains strong, though it’s down from its 2007 high since slowing household income growth has had its effect.

Household income growth fell to 8.7% in the first quarter this year, compared to 9.4% at the same time last year, owed to a slowdown among the industrial sectors, which has led to consumers working in these sectors taking a more cautious stance.

“Even as sentiment moderates a bit, it is important to note that we are looking at a slowdown in consumption growth,” Jeff Walters, a BCG partner who oversaw the research, said in a statement. “Consumption in 2016 will be tantamount to consumers’ moving from the fast lane to the middle lane on the economic highway. They are not pulling into the breakdown lane.”

What’s driving the increasing consumption?

China’s consumers are shifting statuses—upper middle class households are increasing, middle class and affluent consumers in small cities are on the rise and a new generation of younger, freer-spending consumers are coming to market.

According to BCG, the number of upper middle class and affluent households will have nearly doubled to roughly 100 million, or 30 percent of the urban population, by 2020.

“The spending intentions of this group remain constant, and the spending growth rate is rapid at 17 percent,” the report noted. “Almost 30 percent—the same as in 2015—are planning to spend more this year.” And that’s (at least in part) because half of the upper middle class and three quarters of the affluent consumers work in the high-end service sector.

Consumers in the emerging middle class, the middle class and aspirant categories, on the other hand, whose spending has been growing at 5 percent, said they would have to tighten the purse strings. Only 25 percent of these consumers will spend more in 2016.

“China’s ‘young generation’ is growing quickly in both numbers and income,” according to the report. “Those aged 18 to 30 years old will likely make up more than one-third of the urban population by 2020.”

Consumption among them is growing 14 percent each year, twice the pace of the previous generation (those now older than 35), and their share of total consumption is expected to increase from 45 percent to 53 percent by 2020.

These young up-and-coming consumers were reared while China was experiencing expanding wealth in its transition to a market-based economy. As such, 60 percent of them agree with the sentiment: It seems like every year there are more things I want to buy. Two-thirds think: Some products are just too important to me to scrimp on.

“One constraint on their intentions may be wages: many young generation workers are employed in lower-paying retail and commercial-service sector jobs than their last generation counterparts,” BCG noted.

Stock market turmoil has little effect on daily life

Daily life in China, consumption included, has been little affected by the tumult in the country’s stock market. More than half of Chinese consumers think the market volatility is typical, and more than 40 percent think it’s a correction to the stock market bubble that formed following a period of strong growth. Nearly half of consumers said stock market fluctuations don’t affect their consumption at all—70 percent of urban households don’t invest in stocks anyway and those who do have more money and are more likely to increase spending.

“Housing-market stability is a much more critical consideration for Chinese consumers, who continue to be optimistic about housing prices,” BCG said.More than 80 percent of urban households are homeowners, 60 percent of whom still have unrealized gains in value. Nearly 60 percent of consumers say home values will rise in one or two years and one-third said they would buy property in that time. The younger, more affluent and mid-tier consumers are even more optimistic, with close to two-thirds saying housing prices will rise in the next couple years.

It’s all about trading up

“Chinese consumers like to trade up, but the mix of objects of their desire is undergoing some transition,” BCG said. “Infant and baby products, consumer electronics, and financial services remain the three categories in which consumers are most likely to trade up. Personal-care products—such as for skin care and beauty—and travel and vacations are moving up the list. Cars and durable goods are moving down, perhaps indicating that consumers are manifesting some uncertainty in the current environment by postponing trading up in big-ticket categories.”

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