The target year is 2020, and the subject on the minds of many world economists: the Chinese consumer.
In a report published last month, “Consuming China: How to get ready for the next stage,” McKinsey & Company predict that consumption will replace investment as the driving force of China’s GDP growth. Meanwhile, Dong Tao, Asia chief economist for Credit Suisse, boldly predicted that in 2020 Chinese consumption will overtake that of the United States and become the world's largest consumer market.
“Meet the Chinese consumers of 2020” another recent McKinsey study described the profiles to expect of China’s mainstream consumers.
The most "shrewd" consumers
Chinese shoppers are famous for their pragmatic consumer approach, which will not change even as their revenues increase. They often set a budget before buying and evaluate the usefulness of goods. Only when a potential Chinese buyer is clear that a product is worth the money do they start looking for the most cost-effective deal.
The McKinsey report shows that this “savvy” Chinese shopping style, taking the trouble to carry out pre-purchase research before buying, won’t change in the coming decade. And this is particularly obvious while price comparisons are becoming more and more accessible with Internet.
Changing spending patterns, aspirational temptations
Just like their counterparts in the developed countries, the Chinese will change their spending habits from pursuing solely the necessities to becoming mature consumers who are more demanding about goods and services. For example, the emotional factors such as whether or not the commodity can reflect the personality of the buyer will greatly influence their purchase decisions. This is because as income increases the personal expression and self-awareness of consumers will grow continuously. This not only applies to commodities such as cars or personal care products, but also to mass merchandise such as milk or detergent.
As a consequence, niche brands are likely to become more popular in tomorrow's China. So far, general public brands have been very successful in China. This is partly because when consumers were buying their first refrigerator, first car or first phone of their lives, they had little experience or guidance about a good’s quality or safety apart from the brand and its reputation. But as Chinese shoppers become more experienced buyers, they’ll gradually gain that sense of security that prompts people to choose niche brands. Besides, this will also become a way of "trading up" to reflect their personality.
About the loyalty to brands
Though Chinese consumers adore branded goods, their fidelity to a certain brand is much lower than that of their Western counterparts. They generally prefer to choose from several of their favorite marks.
What this implies is that as the Chinese become richer, the young and affluent class will grow more loyal to the brands they love. On the other hand, there will also be a substantial growth of brands that Chinese shoppers can choose from so the large consumer goods companies will face greater competition and have to adapt to this trend.
It’s only in the last ten years that China has started to have modern retail channels. Shopping is not just a necessity but also a recreational activity for many households. This is particularly true for migrant workers or the consumers in smaller provincial cities. But the entertainment value of shopping malls will decrease as the recreational industry and personal consumption patterns develop.
For instance, in 2020 e-commerce will account for 15% of China’s retail sales. Certain categories of consumer electronic goods will contribute up to 40 % of these sales while the e-commerce in daily necessities should grow from 1% today to about 10%.
What does China need to do now?
It’s still another eight years before China technically turns into a consumption-led economy. So what does it lack most on its way to this transformation? The answer is a system in which vigorous laws, regulations and market governance are set up to encourage spending.
In the American, Japanese or European markets, from buying water to whatever is sold in markets such as food or shoes, consumers are much more protected from buying fake goods because of vigorous governmental inspections. Anyone committing fraud will face a severe penalty and can lead to the ruin of a company. These strict consumer protection systems result in the safest consuming markets in the developed world.
Needed: a sound consumer protection system
In contrast, Chinese markets are still in chaos. A terrifying example is that even after the revelation of the scandal of children being poisoned with melamine-tainted infant milk, similar vicious incidents were discovered in 2009 and again recently in Gansu, Chinghai and Jilin provinces where the melamine dose exceeded the allowed maximum by 500 times.
The original poisoning caused the death of several toddlers while affecting tens of thousands of the others in 2008. At the same time, endless scandals involving counterfeit goods such as the oil recycled from garbage, adulterated drugs and liquors continued to be disclosed.
While it is the “World’s factory”, alas, China is far from producing its own “world-class brands” for its domestic consumers. To improve such an adverse market and give birth to a healthy consumption-led economy, China has a long way to go in reforming its consumer protection system.
Quality control is the typical characteristic of a consumer society. China hasn’t yet become a consumer society. Consumers haven’t been taken seriously so its businesses don’t grasp the notion of brands. They don’t yet know how to manage and use brands properly. China's way of getting involved in globalization has been by providing the grunt labor.
Thus, what China is most lacking in the transitional period over the next few years is neither capital, nor techniques, but vigorous systems and dependable laws.
Another key to lead China into a bona fide consumer economy is the safeguard of a quicker and more stable growth of people’s real revenue to lay the foundation for spending power.
At the 18th Congress of the Chinese Communist Party, the government set the goal of doubling China’s gross domestic product (GDP) as well as the per capita income of urban and rural residents by 2020. This is the first time the Chinese Communist Party has concretely mentioned the target of doubling people’s income.
To accomplish the goal, the authorities have to find the entry point of a sustained breakthrough in reforming income distribution, such as the introduction of an inheritance tax. Even if the starting point is as low as, say, 10%, it will still play a role. For the rich, this might encourage them to consider anticipating consumption or transfering their assets. All of this can to a certain extent stimulate spending. As for the value-added tax, even if it’s revised down by a symbolic 1%, it could still relieve the pressure on businesses, increases people’s revenue and promote consumption.
The government should widen its policies for stimulating consumption, and explore appropriate measures such as tax exemptions, tax rebates, and interest subsidies. For example, goods such as automobiles and cosmetics which were once considered as luxury items, and therefore subject to a consumption tax, have become basic consumer goods. The consumption tax should either undergo a gradual reduction or simply be abolished.
As China enters a middle and late industrialization period, and a peak of urbanization, services-led consumption in the sectors of housekeeping and elderly care should be included in government policy to promote the Chinese economy. Not only will this help China’s economic growth, but also improve people’s well-being.