Has the Chinese Consumer Come and Gone?

It’s no surprise that China isn’t the same as it once was. Over the years China has transformed into a consumerist nation. Before that, China was known for its industrial might. But now the rise of the Chinese consumer has begun. And it’s gotten businesses frantically pushing their products into Asia.

In the coming decade, China is likely to be the most important consumer nation on the planet. They’ve already taken the second spot when it terms of total consumption. They’re still behind the US; but China’s total consumption increase is arguably larger.

As you can see in the graph below, China’s estimated consumption was larger than the US in 2013.

China US Change in Consumption

Source: The Economist

Why is China increasing consumption?

It all boils down to income. Chinese citizens now enjoy wealth they’ve never had. More households are moving into a higher income bracket. They are moving into what’s known as the middle income class.

With all this extra income, buying necessities is no longer a worry for many. Instead of saving, Chinese citizens are looking to spend more on products — mainly foreign products.

Today, China is a very important lever for foreign revenues. With their buying habits, Chinese consumers clearly display their desire to Westernise. They could be buying European designer bags one day. And buying their second German-engineered car the next. Regardless, the Eastern world is looking a lot more ‘Western’.

 

McKinsey & Co demonstrated China’s income shift in their book, The One Hour China Consumer Book.

They showed that China’s total income dwarfs that of others by far. To grasp how China stacks up against other nations, take a look at the graph below.

China total household income

Source: Credit Suisse; World Bank Data Book

China’s total income is more than US$5 trillion a year. This makes total household incomes of Brazil, Russia and India look small by comparison. Common sense will probably tell you that China should have a larger total income. They have population of 1.381 billion, after all — in other words, more incomes to add to the total.

A more meaningful statistic would be income per household. Even better would be discretionary spending per household.

Through surveys, McKinsey has estimated how China’s spending will change in the coming decade. In 2030, spending growth on necessities is expected to decrease.

This additional income will be channelled towards discretionary items. These could be things like personal items, luxury cars or multiple mobile phones. The graph below will give you a better idea of how household spending will change over time.

Discretionary categories are showing the fastest growth

Source: McKinsey Analysis

But instead of talking about predictions and forecasts, let’s look at the present. We already see today that Chinese consumers are having an effect on the foreign goods market.

Take baby formula as an example. In 2015, Bellamy’s Australia [ASX:BAL] and other food producers rose to fame on the back of Chinese consumers.

Formula was being bought in bulk. Large quantities were bought up by Chinese consumers. And some even tried to selling Australian baby formula out of their homes. By marking up the prices severely, they were able to make enough to quit their 9–5 job.

Eventually, supermarket chains started putting restrictions on baby formula. No one person was allowed to buy more than four containers of formula.

The shocking rise in demand was a big reason why Bellamy’s was such a success last year. Investors who bought into Bellamy’s at the start of 2015 enjoyed returns of more than 700%. All because Bellamy’s profit guidance just wouldn’t stop increasing.

Blackmores [ASX:BKL] was another product Chinese consumer took a shining too. Blackmores’ shares reached above the $200 mark in 2015, posting returns of 519.43%.

But is the party over? Has China gotten over Australian products they once loved so dearly?

Regulatory changes that might not change much

An article in the Australian Financial Review this morning highlighted a growing fear. The message was that Australian businesses couldn’t rely on Chinese consumers. A major Australian retailer has seen a significant drop in sales of vitamins and other products favoured in China.

Many are pointing to regulatory changes Beijing instigated six weeks ago. Policymakers imposed an e-commerce tax on foreign foodstuffs bought online. The tax could be as high as 11.9%. But before you start panicking, let’s use a bit of common sense.

The e-commerce tax is aimed at boosting China’s consumer industries. And while this might pose a temporary drop in sales, it won’t last forever. Already Chinese policymakers have delayed the regulatory changes. The delays have seen importers increase their orders.

And within the e-commerce tax there is what’s called a ‘positive list’. This list allows goods to be exempt from the value added tax. Many investors are still confused about what is actually included in this list. The goods that are expected to be safe are wines and pet foods.

Yet businesses are still unconcerned about the proposed regulations. As time goes on, the ‘positive list’ will be amended and expanded according to market demand. So instead of being fearful of potential regulations, be pessimistic of the pessimists.

Härje Ronngard,

Junior Analyst, Money Morning

PS: China has propped up the commodities market for a while through its infrastructure spending. But mineral commodities are now in their down cycle. Yet this doesn’t mean we can’t profit from Chinese consumers anymore. Money Morning’s emerging trends analyst, Ken Wangdong, has written a report showing you how to profit off China in the future. China’s market gives Australia access to 120 million new customers. Every Aussie consumer item could feed, potentially, a $150 billion market.

Ken’s report, ‘China’s New Boom’, will show you how to profit off of China’s emergence. To get your free copy of Ken’s report, click here.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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