ANZ Research. Special Report on China Consumption - Tapping the Impending Consumption Boom in China. To fill the void, ANZ teamed up with Roy Morgan Research to develop a new index that gauges China's Consumer Confidence and Inflation Expectations. We are delighted to announce the results of January - May 2014 in the accompanying release.
- China’s private consumption was around USD 3.3trn in 2013, almost as large as Germany’s GDP. However, there is still huge room for Chinese consumption to grow at a fast pace. China’s private consumption represents only 36% of its GDP, compared to the world’s average of 60%.
- China’s consumption will be boosted by a set of ongoing and expected structural reforms. The establishment of a universal medical insurance scheme and a minimum pension in the rural sector will substantially reduce precautionary savings and promote consumption. The rural land reforms will also transfer wealth from the state to village residents, creating an enormous wealth effect. Household earnings will be lifted by rising wages and labour productivity.
- A re-balancing China means consumption growth will soon outstrip GDP growth. By 2020, China’s private consumption will represent 44% of its GDP and will be around 70% of the size of the US consumer market, compared with just 40% today. China’s consumer sentiment will exert a larger impact on economic growth, the inflation outlook, and monetary policy.
- China’s rising middle class will help drive the consumption growth. Over the next few years, 100m more middle-income households will enter the market and their spending will make up two-thirds of the total urban consumption, compared with just one-third in 2012.
- To anticipate this trend, a tool is needed to better measure the pulse of Chinese consumers. While existing consumer confidence surveys are available, consistent and objective private-sector sponsored surveys are few. To fill the void, ANZ teamed up with Roy Morgan Research to develop a new index that gauges China’s Consumer Confidence and Inflation Expectations. We are delighted to announce the results for the period of January-May 2014 separately.
STYLISED FACTS OF CHINA'S CONSUMPTION
China declared to deepen reforms comprehensively after the 3rd Plenum in November 2013. The nation strives to double its per-capita income by 2020 from 2010 levels by shifting from an investment-led growth to a consumption-driven growth.
Meanwhile, concrete structural reforms are under way or expected to take place in order to achieve this grand strategic shift.
- A nationwide health insurance system has been set up, covering more than 96% of the 1.35bn population.
- A minimum pension has been established for rural retirees, who previously relied on family-based solutions.
- The ongoing land lease title reform will transfer the de facto land ownership from the state to rural farmers, creating a sizeable wealth effect that will boost rural consumption.
- A unified pension system is due to be created in the following years, and it will not only enhance China’s social security system but also have far-reaching implications for China’s capital markets.
- Further reforms in China’s education and health care sectors will help reduce the precautionary savings of Chinese consumers and unleash their consumption potential.
- The government is also addressing the issue of rising property prices facing low-income earners and young people by reintroducing a public housing program.
- The overarching theme of rebuilding China’s social safety net, together with an accelerating urbanisation process focused on people’s welfare, will become a centrepiece in the overall development strategy for the remainder of the decade.
Even by today’s standard, China’s consumption deserves serious attention. The size of China’s private consumption is gigantic. In 2013, its nominal value was estimated to be USD3.3trn, representing only 36% of China’s GDP but equivalent to the 2013 German GDP or the whole Japanese economy in Purchasing Power Parity (PPP) terms. Given its prominent size, China’s consumption is not only locally but also globally relevant and significant.
However, China’s private consumption to GDP ratio has been way below the international average. According to the World Bank, private consumption represented 60% of world GDP in 2012. For countries categorised as the middle-income group - to which China belonged in 2012 - the average consumption ratio was 55% of GDP or 19ppts higher than that of China. China’s consumption ratio has been falling over the past few decades.
TRACKING THE CONFIDENCE OF CHINA'S CONSUMERS
The growing ‘consumer class’ will become a more significant and stable driver of overall economic growth. For business, the changing landscape of China’s consumption means abundant business opportunities. Taking financial services for example, the increasing consumption in China is bound to spur the growth of the under-developed consumer credit businesses. China will surely follow the experience of the emerging economies and the developed economies, but its size will be several times bigger. As e-commerce continues to prosper and the middle class is technologically savvy, the demand for electronic payment services will explode. With rising income, Chinese households will be able to use financial leverage in their purchases.
Consumer confidence is an important tool to track China’s growth momentum. We compared the movement of a consumer confidence index released by the National Bureau of Statistics (NBS) with China’s GDP growth and other economic indicators (Figures 13-16). The level of consumer confidence was broadly in line with the economic momentum over a longer horizon, suggesting that consumer confidence will be a useful tool to track China’s economic climate.
We also noticed that China’s consumer confidence has become more volatile since 2008. Although it may be due partly to some methodology changes by the NBS after 2009, the fluctuation is not surprising as China’s economy has opened up further in recent years, the global economy has become more volatile after the Global Financial Crisis, and China’s growth has become more policy driven. However, with the quick reforms in China’s social safety net, we expect China’s consumer sentiments will become stablised in the future. As China’s consumers gain more global influence, a tool is needed to measure the pulse of Chinese consumers.
It is vital to have an accurate measure of consumer sentiment in China. While existing consumer confidence surveys are available, consistent and objective private-sector sponsored surveys are few. To fill the void, ANZ teamed up with Roy Morgan to develop a new market index that gauges China’s consumer confidence, inflation and property price expectations starting from January 2014. Every month, we will survey 1,000 households across major cities in China based on a well-established methodology that has been used by Roy Morgan for many years across Asia Pacific. We believe that the ANZ-Roy Morgan Consumer Confidence Index and its sub-indices will provide policy makers, investors, corporates, academics and China’s economy watchers with valuable insights into the Chinese consumer market and with the ability to identify inflection points in consumer spending behaviours, in addition to sectoral and market trends.
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