China enters a new era of consumption

(People's Daily Online) 17:01, April 11, 2014

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Mitch Barns, chief executive officer of Nielsen (People's Daily)

China is expected to see a boost in household consumption from today's 35 percent of GDPto between 45 and 50 percent by 2020. Consumers in second-tier and third-tier cities arenow the primary drivers of consumption growth as their populations show a greaterpropensity to spend on current needs and wants. Mitch Barns, chief executive officer ofNielsen, a leading global provider of information and insights into what consumers watchand buy, spoke at the Boao Forum for Asia's annual conference, taking place this week inHainan Province.

The key for China's economy to achieve a sustainable growth is decided by how successfulit is in achieving the transformation from investment-led to consumption-led. Thecontinual increase of residents' income will play a certain role; however, a large-scaletransformation will ultimately depend on a greater proportion of the consumers' income onconsumption. To achieve this, China has to understand consumers' concerns in the firstplace.

The Word Bank puts Chinese household final consumption today at about 35 percent ofGDP, compared to the worldwide average of 60 percent. Meanwhile, the household savingsrate as a percentage of disposable income almost doubled in China from about 16 percent in1990 to more than 30 percent two decades later. Relatively high education cost and to-be-improved healthcare and pension system are main reasons why Chinese consumers needto save. The Chinese government has taken encouraging policies to further boost domesticconsumption, including raise incomes and expand investment in education and healthcare.

Nielsen's survey shows that only 13 percent of Chinese have ever held a loan. The mainobstacles for Chinese consumers to borrow are they "don't like the feeling of carrying debt"and the high interest rates. China is relaxing its control on bank lending rates, and allowsthe market to play a decisive role in economic activities. We believe that more Chineseconsumers will have a new understanding of loans and their consumption will bestimulated.

In the future, China is expected to see a boost in household consumption from today's 35percent of GDP to between 45 and 50 percent by 2020. If the figure is 50 percent, itmeans 26.9 trillion yuan additional consumption in 2020 compared with that of 2012, andthe annual consumption per capita will be twice more than that of 2012. Therefore, the keyis to identify and meet the consumers' changing needs, which is the only way to turnconsumers' strong desire into actual purchasing power and start a virtuous cycle of China'sconsumption.

For consumers in China's rural areas, the opportunity may well lie in providing a first-timebrand experience, while in cities, the opportunities lie in comprehensive consumptionupgrades. The purchasing power in mature markets like the first-tire cities is stabilized;the second-tier and the third-tier cities is vast and has unlimited potential, the fourth-tireand the fifth-tier cities remain to be matured. Some leading second-tier and third-tiercities will become "new first-tier" cities, such as Chongqing, Suzhou, Wuxi, etc. These citieshave just experienced massive infrastructure construction, and their populations show agreater propensity to spend and a strong desire to buy premium, branded products. "Newfirst-tier" cities are now the primary drivers of consumption growth in China, and thecountry is entering a new era of consumption.

In addition, the second-child policy is expected to bring a great release of the potentialmarket for babies, children, and education. E-commerce and even mobile commerce willalso be real drivers for stimulating domestic consumption. Ultimately, today's Chinesemarketplace is nuanced and sophisticated. Success requires a sharp understanding ofchanging consumer habits and careful timing. More importantly, it will speed up China'seconomic transformation.

The article is edited and translated from《中国消费迈入新时代》, source: People's Daily

（Editor：DuMingming、Yao Chun）