Explainer: Boosting consumption in China

What are the top policy issues in China right now? In this series of explainers on China, we have gathered the knowledge of experts at the World Economic Forum, to write about topics ranging from inclusive growth to urban migration. See the full list of explainers on China’s top policy issues at the bottom of this article, and learn more about our Annual Meeting of the New Champions in Dalian, September 9-11, here.

Policy Issue: Rising Consumerism
What: Growing demand for higher-quality goods and services
Related content: The Rise of the On-Demand Economy II Inclusive Growth and Development report 2015

After decades of investment and export-driven growth, China aims to rebalance its economy from potential industrial overcapacity in the ‘’new normal’’ by boosting domestic consumption. Chinese domestic consumption has grown steadily while the investment share of GDP has been declining, and Chinese consumer confidence shows signs of continued growth despite the recent economic slowdown. Key drivers of consumption include China’s emerging middle class, set to double from now to 2025, which is using its increasing discretionary spending on imported, higher quality and luxury products. China’s urbanization rate further boosts consumption levels by convening urban middle- class dwellers in densely populated cities with greater employment opportunities and accessible  retail channels. Most notable, China’s thriving e-commerce ecosystem, which has replaced retail shops with around-the- clock online B2C, C2C and O2O shopping platforms, has fuelled the consumption demands of China’s increasingly savvy shoppers.

With 668 million internet users and 594 million mobile users, China is one of the world’s most dynamic e-commerce markets and is projected to grow at an annual rate of around 25% over the next several years. Its growing e-commerce market is presenting new business model innovations that are challenging traditional retail models and transforming the relationship between consumers, retailers and suppliers.

China’s consumption power presents enormous opportunities for retailers, both domestic and foreign. While imported goods are considered to meet higher quality standards, home-grown retailers are increasingly competitive and more adept at customizing to local market needs. A more competitive market points to the importance of market intelligence to cater to China’s price-conscious and brand-fickle shopper, and the need to develop a deeper knowledge of consumer behaviour segmented by demography and geography. Moreover, China’s growing consumer market has created opportunities for the services sector, which accounted for 48.2% of GDP last year and overtook industry’s share of 42.6%, and will certainly increase as domestic demand for services increases, namely in entertainment, recreation and healthcare.

Consumer behaviour in China is also leading to a larger number of outbound Chinese tourists, forecasted to double to 200 million a year by 2020 while spending in overseas markets will continue to grow. A potential limiting factor for China’s consumption rate is the country’s high savings rate, as citizens try to safeguard against illness and old age. The consumption ratio could increase, however, as the Chinese government provides better healthcare and pension coverage. The recent anti-corruption crackdown has also dampened consumer appetites for luxury goods, entertainment, dining and services.

More China Insights:

• Growing ambitions to become a world leader in technology
• How China can address inequalities
• China’s outbound investments
• China’s environmental goals

 

Image: A woman carrying a baby walks at a touristic area of Huaxi village, at Jiangsu province December 2, 2010. In China’s richest village of Huaxi, a booming market town of 36,000 in the affluent eastern province of Jiangsu, every family has at least one house, two cars and $250,000 in the bank. Picture taken December 2, 2010. REUTERS/Carlos Barria