China's Consumer Revolution - Winners and Losers

Rapid and sustained GDP growth in China has generated an unprecedented rise in disposable income that has transformed material living standards. Thirty years ago, more than 300 million people - about one third of the total population - lived in absolute poverty; today, the existence of a sizeable 'Chinese middle class' symbolizes the consumer revolution that has accompanied market-oriented reforms. Yet recent years have seen a steady increase in incidents of social unrest, and expressions of discontent have meanwhile risen to record levels.

The adverse distributional consequences of growth help resolve this apparent paradox. The material benefits of growth have indeed been huge, but they have been distributed in neither an equal nor an equitable manner. In short, while Chinese society has become better off, it has also become more unequal; alongside growing affluence, a serious legacy of poverty persists. This is evidenced not only by material deprivation, but also in discriminatory access to education and health services.

Disposable income growth has facilitated improvements in material consumption ….

Under the impact of reform, the structure of consumption has changed markedly. The rise in disposable income has facilitated access to a more varied shopping basket, in which the share of non-basic items (non-staple foods, consumer durables, electronics, brand name products, and so on) as a percentage of total spending has increased vis-à-vis basic necessities. In recent years, spending on services that have been deregulated - housing, education, health, transport - has also increased quite sharply. Such changes have been most pronounced in cities. But the emergence of the same broad pattern in more prosperous parts of the countryside is a reminder that as long as incomes continue to rise, the rural market will become an increasingly important source of consumer demand.

Urban dwellers' access to consumer durable white goods (refrigerators, washing machines, color TV sets, etc.) has external pagerisen sharplycall_made since the mid-1980s, and ownership of such items has now become almost universal. The scope for further rises in consumption of such items is now limited, except through replacement or upgrading. The real potential for future expansion in consumer spending lies in higher-end products. Some of these - for example, external pagecell phonescall_made, computers and cars - have experienced explosive growth in recent years.

In the rural sector, the picture is rather different. Here, demand for domestic consumer durables, such as color TV sets, washing machines and refrigerators, has been steadily rising for some years, but is far from reaching saturation point. Meanwhile, the rural market for higher-end products, such as computers and cars, is still largely non-existent.

… but only for those whose incomes have risen by a sufficiently wide margin

Official Chinese estimates show that since 1985 there has been a sharp widening of the gap between urban and rural per capita income and consumption spending. Regional differences have also become more pronounced. In 2009, for example, only ten out of 31 provinces enjoyed levels of household consumption above the national average. Nine of these were coastal, with three also being provincial-level municipalities (Shanghai, Beijing and Tianjin). At the bottom end of the spectrum, consumption spending in five provinces - all of them in the far west - was at least one-third below the national average. In a further ten, it was at least 20 percent below that level. In the early 1980s, Chinese society was one of the most equal in the world. Today, with a external pagenational Gini coefficientcall_made of 0.47, it is one of the most unequal, in terms of income distribution.

Identifying the drivers of China's consumer revolution?

Due to the impact of reform-driven growth, almost all Chinese people have benefited from rises in their disposable income. China's official poverty criterion is set at a mere $ 0.5 per day. On this basis, those living in absolute poverty now constitute well under five percent of the population; even using the more conventional criterion of $1 per day, the corresponding number would still not exceed ten percent (though this is still 133 million people, greater than the total population of Japan).

However, it would be wrong to suppose that the remaining 90 percent of China's population all allocate a significant part of their income to spending on non-basic items (staple foods, cheap clothing and simple everyday household goods). Indeed, aexternal pagerecent articlecall_made in China Economic Quarterly suggests that even after three decades of rapid GDP growth, the Chinese 'consuming class' comprises no more than 300 million people. In other words, only about a quarter of the population commands an income sufficient to permit significant discretionary spending.

This consuming class is thought to generate about $800 billion, or 45 percent, of total private spending. As such, although constituting only a small proportion of China's total population, the consuming class's aggregate spending is already greater than that of South Korea and Taiwan combined, and exceeds that of the whole of India. However, average per capita discretionary spending remains less than 30 percent of that of South Korea and Taiwan. Meanwhile, in both aggregate and per capita terms, China's consumption expenditure lags a long way behind major developed countries, such as Germany, Japan and the United States. This lag is likely to persist for some years to come, although it is a salutary reminder of how quickly change is taking place in China that recent estimates suggest the size of 'Consuming China' has more than doubled since 2005.

These 300 million people are a far from homogeneous group, however, and can be disaggregated into two major sub-groups. The first comprises those at the top end of the income spectrum, who in recent years have been the main purchasers of expensive apartments and luxury cars. The mainstays of the second and larger group of consumers are those who are sometimes referred to as China's "middle-income and affluent consumers" (MACs). It is they who have played the central role in driving China's consumer revolution, fueling the consumption boom in white goods, digital consumer products (computers, cell phones, cameras) and brand-name goods.

Location, location, location

The locational characteristics of China's various consuming groups are quite clearly defined. The absolute poor, and those whose spending behavior is, for the time being, still focused on the purchase of basic items, are officially registered as rural residents. Most of them still live in the countryside, although increasingly large numbers have now migrated to cities, where they mainly eke out a living as workers in poorly paid jobs in the informal sector. By contrast, the affluent households that are driving China's consumer revolution live in large-scale urban concentrations - Beijing, Tianjin and Shanghai; in coastal, provincial, high-income cities such as Dalian, Nanjing, and Chengdu; and in some peri-urban areas adjacent to these and other prosperous cities.

As incomes rise, so does the potential for increased discretionary spending. As this happens, the number of MAC households will also expand, and associated consumption behavior will spread to smaller cities that have, to a greater or lesser extent, so far been excluded from recent consumer market developments. The likely pace of expansion is captured in a external pagerecent projectioncall_made by the Boston Consulting Group that suggests that by 2020, the number of people belonging to MAC households will have risen to around 415 million. In the past, the geographical concentration of China's 'Consuming Class' has both encouraged and facilitated large-scale investment by manufacturers, distributors and retailers to serve market needs. As the geographical scope of this market expands, the greater challenge facing these actors will be to formulate and implement investment and market strategies capable of accommodating future increases in demand.