China’s Consumer Decade (Podzept – with Deutsche Bank Research)

Summary (You can listen to the podcast by clicking here)

Yi Xiong, China Economist at Deutsche Bank analyses the Chinese economy over the next decade, highlighting the crucial role of consumption in driving growth.

• Historically faster growth in exports and investment have overshadowed growth in consumption.

• Consumption spending per person has grown around 8% per year in real terms during the last four decades.

• Xiong projects that with the current rate of 12% growth in consumption, China will soon become the largest consumer market in the world, leaving the US and the EU behind.

• When questioned about the potential risk of consumption slowing down (as in Japan), he counters with two arguments. Firstly, a large income gap between cities (Gansu vs Shanghai) implies a large potential for consumption upgrades. Second, 66% of income is saved (vs 4% in OECD), which implies large spare capacity to increase the propensity to consume in the future.

• Xiong further draws attention to factors that will change China’s consumption pattern. First, the rural population (60% of the whole) is increasingly shopping online. Second, China’s baby boomers (25% of the population), who benefited from the economic liberalization policy in the 1970s, are set to retire in the next decade.

Why does this matter? China’s current economic outlook remains gloomy as 3Q growth slows down to a 27-year low at 6%, US-China trade frictions remain uncertain, and the Chinese credit crunch worsens with total debt to GDP rising to 300%. Amid this, consumption appears as a silver lining that could single-handedly drive the growth of China in the next decade, making a bullish case for Chinese consumer-oriented sectors – especially E-commerce.