China is expected to see a boost in household consumption from today's 35 percent of GDP to between 45 and 50 percent by 2020. Consumers in second-tier and third-tier cities are now the primary drivers of consumption growth as their populations show a greater propensity to spend on current needs and wants. Mitch Barns, chief executive officer of Nielsen, a leading global provider of information and insights into what consumers watch and buy, spoke at the Boao Forum for Asia's annual conference, taking place this week in Hainan Province.
The key for China's economy to achieve a sustainable growth is decided by how successful it is in achieving the transformation from investment-led to consumption-led. The continual increase of residents' income will play a certain role; however, a large-scale transformation will ultimately depend on a greater proportion of the consumers' income on consumption. To achieve this, China has to understand consumers' concerns in the first place.
The Word Bank puts Chinese household final consumption today at about 35 percent of GDP, compared to the worldwide average of 60 percent. Meanwhile, the household savings rate as a percentage of disposable income almost doubled in China from about 16 percent in 1990 to more than 30 percent two decades later. Relatively high education cost and to-be-improved healthcare and pension system are main reasons why Chinese consumers need to save. The Chinese government has taken encouraging policies to further boost domestic consumption, including raise incomes and expand investment in education and healthcare.
Nielsen's survey shows that only 13 percent of Chinese have ever held a loan. The main obstacles for Chinese consumers to borrow are they "don't like the feeling of carrying debt" and the high interest rates. China is relaxing its control on bank lending rates, and allows the market to play a decisive role in economic activities. We believe that more Chinese consumers will have a new understanding of loans and their consumption will be stimulated.
In the future, China is expected to see a boost in household consumption from today's 35 percent of GDP to between 45 and 50 percent by 2020. If the figure is 50 percent, it means 26.9 trillion yuan additional consumption in 2020 compared with that of 2012, and the annual consumption per capita will be twice more than that of 2012. Therefore, the key is to identify and meet the consumers' changing needs, which is the only way to turn consumers' strong desire into actual purchasing power and start a virtuous cycle of China's consumption.
For consumers in China's rural areas, the opportunity may well lie in providing a first-time brand experience, while in cities, the opportunities lie in comprehensive consumption upgrades. The purchasing power in mature markets like the first-tire cities is stabilized; the second-tier and the third-tier cities is vast and has unlimited potential, the fourth-tire and the fifth-tier cities remain to be matured. Some leading second-tier and third-tier cities will become "new first-tier" cities, such as Chongqing, Suzhou, Wuxi, etc. These cities have just experienced massive infrastructure construction, and their populations show a greater propensity to spend and a strong desire to buy premium, branded products. "New first-tier" cities are now the primary drivers of consumption growth in China, and the country is entering a new era of consumption.
In addition, the second-child policy is expected to bring a great release of the potential market for babies, children, and education. E-commerce and even mobile commerce will also be real drivers for stimulating domestic consumption. Ultimately, today's Chinese marketplace is nuanced and sophisticated. Success requires a sharp understanding of changing consumer habits and careful timing. More importantly, it will speed up China's economic transformation.
The article is edited and translated from《中国消费迈入新时代》, source: People's Daily