Consumers Driving Chinese Economy

Within the affluent segment of the population, a group that Liu calls the “Sugar Generation” will be particularly important to consumption. This group of consumers currently accounts for 10% of the affluent class, he says, but is expected to grow to 30% in the next five years.

“Almost all of these consumers are single children from the post 1980-1990 generation, and they have grown up in a relatively good environment,” Liu said. “They will inherit from their parents, which means they don’t worry too much about the future and are focused only on consumption. This segment of the affluent population will be particularly important to domestic economic growth in China and their consumption power is already starting to emerge.”

It’s no secret that many companies, from Adidas and Nike, to luxury car makers such as BMW and Audi, and clothes retailers including Zara and H&M have done and continue to do exceedingly well in China. And although many investors who were spooked by Europe’s sovereign woes may have ignored companies that derived much of their revenue from China simply because they were domiciled in a European country, increased optimism over the future of Europe, coupled with the economic data out of China, is now resulting in more interest in many of these names.

Nevertheless, it will take some time for consumption to make a material dent on Chinese economic growth, according to Edmund Harriss, Investment Director at Guinness Atkinson Funds in London. “We still have a strong bias toward China but the recovery we have seen has been more of a cyclical one, where exports have played a role, but there has also been some loosening of monetary policy by the Chinese authorities as well as an increase in infrastructure spending,” he said.

“However, retail sales have been solid and the role of consumption is clearly important and growing, with the demand for property at the prices talked about and people’s ability to buy high end cars, among others,” Harriss said.

But as much as the affluent are important in China, for consumption to make a real impact on economic growth across the board, Chinese society needs to become more urbanized. The government aims to bring urbanization to 60% by 2020, according to Harriss, and has an ambitious plan that involves a number of reforms, including the use of labor mobility and the portability of pensions. “The government also needs to continue to make affordable housing available and once you see that happening, you will then see more of a consumer-based society happening,” he said. – Savita Iyer-Ahrestani