Three trends to watch in China’s consumer sector
Three trends to watch in China’s consumer sector
As the world continues to try to contain the spread of Covid-19, China is among the few countries sustaining a return to normal activity.
Investment and export areas of the economy have so far led the recovery, but the consumer sector is now picking up more meaningfully.
Prior to the pandemic, the contribution of consumption to GDP in China was expected to increase and become a more significant driver of economic growth. Private consumption currently accounts for around 39% of GDP. We expect this figure to rise further as the transition from an investment-led to consumption-driven economic growth model continues.
Here, we look at three key trends in this already large but expanding consumer market.
1) Market leading companies are becoming more dominant
We are seeing industry-leading consumer companies, domestic or foreign, gain market share. This has been most notable in the home appliance, sportswear, education and home furniture segments.
The largest players have greater economies of scale, are growing faster and are able to cut prices in order to consolidate the market. The growth of e-commerce has created a more level playing field in terms of information availability, providing consumers with better awareness of pricing.
The Covid-19 pandemic has accentuated this existing trend.
2) Overseas consumption is returning to China
Chinese citizens are estimated to account for over a third of global luxury goods spending. Yet only a small fraction of this spending has historically been in China. This is changing.
In the past few years, the Chinese government has taken a series of measures to encourage domestic spending and to support its duty-free industry. Some of these have effectively been to render overseas spending relatively less attractive. Back in 2018, for example, VAT was cut to 13% from 17%.
Meanwhile, the tropical island province of Hainan has received policy support to encourage tourism. This year the government lifted the duty quota cap by over 300%, while the unit price quota was scrapped.
The impact of the pandemic has been to fan this trend. With international tourism constrained by lockdowns and quarantines, there has been a recovery in domestic tourism, which should continue to benefit after the pandemic abates.
3) Online integration of resources
Many consumer sector companies are increasingly looking to integrate their online and offline businesses. This would make the supply chain more efficient as it would enable stock to be stored closer to the end customer, in turn reducing shipping times and costs.
On the retail side, measures include awarding online purchases with points for future offline purchases. These require investment in technology in terms of databases, supply chains and inventory management systems.
In the education sector, companies are seeking to merge online and offline service offerings. Interestingly, some companies now even have the capability for one teacher to lead a class of up to five thousand students via live-broadcasting. This business model is expected to grow significantly this year.
Focus on the long term
In the near term, the focus may understandably remain on Covid-19’s impact on people and economic activity globally. But once the pandemic recedes as a result of a vaccine, more effective therapeutics or herd immunity, the outlook for growth in China’s consumer sector shall remain strong.
For investors, this area of the economy is likely to become increasingly important. The Central Committee of the Communist Party of China has met to draw up the 14th Five-Year plan for the years 2021-25. Although the final details are not expected to be unveiled until March, investors may look out for further details over new economy development and the outlook for targeted sectors such as consumption.
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