Australia Profiting Off Chinese Consumers

When the US sneezes, the rest of the world catches a cold. This phrase is commonly used to emphasise the importance of the US economy. Put simply, if the US does anything, there will be implications for the rest of us.

This saying may even extend to China in the not too distant future.

To understand China’s rise in power, you need to know the basics of the Cultural Revolution.

Mao Zedong, Chairman of the Communist Party of China, went about changing the Middle Kingdom. In 1966 he saw a different future for China. One that didn’t embrace the values or culture of the past. And it was a future they could never achieve without his guiding hand.

However, the future Mao had mapped out led to around three million deaths. Instead of protecting the individual, Mao was set on protecting the state.

As a direct comparison, these views are opposite to those of the US.

In the US, the rights of the individual are more important than the collective. When someone gets in the way of the collective machine, the individual is not steamrolled. This might be the simple reason capitalism strides forward even as communism flounders.

After Mao’s death in 1976, his successor, Hua Guofeng, didn’t stick to the plan. Instead he set about reversing the damage already done. And as Hua turned back the destructive wheel of communism, China started to grow. Instead of enforcing policy for the good of the state, Hua injected capitalism into China’s veins.

China is now the second largest economy in the world, behind the US. But will they ever take the number one spot held by the US for so long?

Knocking US consumers off their mantle

One advantage China has over the US is their population. With a population of 1.06 billion people more than the US, it suggests China should be able to achieve far more. That’s why China’s competitive advantage is labour. They have an abundance of people. So they can pump out more working hours than other nations.

But they can’t rely on their cheap labour forever. Wages are rising in China. Factory wages have been boosted significantly. It’s been mainly caused by labour shortages and multiple strikes.

That’s why regional governments across China were forced to increase the minimum wage. If they lost their workers, they feared their economic engine would come to a halt. But no longer can they throw labour at work and expect their economy to keep growing.

Instead China will have to move towards other means. What are these other means? In China’s new five-year economic plan, they stated science and technology would be at the forefront of economic growth.

But, right now, it’s their ever growing consumer base that is creating growth. Not just for their own economy, but for other nations as well.

The US is still ranked the number one consumer nation in the world. It’s largely because consumers in the US have higher disposable incomes. And they will therefore spend more money on discretionary items. Yet Chinese consumers are growing fast in number, and could knock the US from their number one spot.

Businesses like to see China’s middle income class on the rise. It means more customers for them. But how is this middle income class defined?

Just like the phrase suggests, the middle income class includes those citizens with incomes classified as ‘middle’. Their disposable incomes range from around $6,000 to $15,999.

But alongside those in the middle income class are the upper-middle income class. Their disposable incomes range from $16,000 to $34,000. The proportion of the population that fits into the upper-middle bracket isn’t overwhelming.

Yet more Chinese citizens are expected to funnel into this group by 2020. According to McKinsey & Company ‘mainstream’ —the upper-middle class income demographic — will grow by 26.6% from 2010–20.

Urban households by annual income

Source: McKinsey & Company

What this will mean for businesses and the country as a whole is obvious. China will be a more prosperous nation, with their consumers influencing global trade more than ever.

And as the population of China’s middle income class rises, more investment opportunities open up for Aussie investors.

What’s good for China is good for Australia

The US is the pre-eminent nation of the world. And it will probably remain that way for years to come. Even if China becomes the number one economy, the US will always be dominant.

But China is arguably more important to Australia. This is because they are our largest trading partner. We are a resource rich nation, and China buys a majority of our minerals.

And it’s not just minerals we can sell to China. We also sell agricultural and various consumer products — many of which are highly demanded by Chinese consumers. Products like honey, baby formula, wine, vitamins and many other products are sold in bulk to Chinese buyers.

Even Starbucks chief executive Howard Schultz believes China to be the company’s biggest market.  Currently, Starbucks has 2,000 stores in 100 Chinese cities. They plan to open 500 stores a year for the next five years.

It’s no secret why they choose Australia, either. It’s because of our brand. They see Australian products as quality…and domestic products as ‘crap’.

The same is true for make up or personal hygiene products. Rather than buy cosmetics in their home country, many Chinese consumer prefer to buy from Europe. Again, they do so because of quality, status and doing the ‘Western’ thing.

Demand for products like baby formula and vitamins have given many Aussie businesses a boost. Companies like Blackmores Ltd [ASX:BKL] and Bellamy’s Australia Ltd [ASX:BAL] were darlings of 2015. They rose to stardom on the back of Chinese consumers.

As you might imagine, there’s plenty of money to be made off Chinese consumers. Not just for businesses, but for you, the investor, as well.

So where are you going to get the most out of your money amid the Chinese consumer boom?

Aussie businesses profiting off Chinese consumers

No one knows 100% what will happen in the future. But the industries expected to see growth from Chinese consumers are those I’ve named above.

These could be businesses in medicine, foodstuff or cosmetics. Anything that consumers buy on a regular or semi-regular basis.

Let go back to our example of Blackmores.

The vitamins company recently doubled their net profit to more than $100 million for FY16. And as a sign of gratitude, the company gave a bonus to all employees. Employees received a bonus of more than 17% of their base wage. But rather than crediting their employees for the success, they should really be crediting the Chinese consumer.

Even wine could continue to enjoy demand from China. While the industry is cyclical, winemakers say Chinese demand continues.

The US is still the most valuable market for both Australia and the UK by total volume. But the fastest growing market for wine is China.

China is ranked the third most valuable at $313 million. This represented growth of 47% just last year. For a brief period in June, China became Australia’s most valuable wine consumer. One can only imagine this to be the norm not too long into the future.

Härje Ronngard,

Junior Analyst, Money Morning

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