China’s slowing growth and market rout may dominate news flow, but the nation’s transition from an investment-led economy to one driven by services and consumption is also worthy of investors’ attention, says Kunjal Gala, senior analyst at Hermes Emerging Markets, who recently visited the country on a research trip.
New v old: In Q3 the Shanghai Composite fell 24.7%, exports continued to fall and growth slowed, darkening the top-down outlook. But positive data highlighting China’s economic transition also emerged: weakness in the heavy industries of the north is being offset by the strengthening consumer goods and services sector, which is expected to grow faster than others in the coming years.
In September, consumer sentiment hit a 15-month high, showing resilience amid the market decline, and CPI inflation reached a 12-month peak during the month, mitigating fears of incipient deflation.
The income effect: The still-buoyant growth of urban areas is a key driver of consumption. According to the National Development and Reform Commission, 9.5m new jobs were created in the year to August, equivalent to 95% of the annual target.
This should support consumer spending: in 2014, urban disposable income per capita grew 7%, contributing to a 10.8% rise in urban consumption expenditure per capita. On the ground, travel accessories manufacturer Samsonite said that products catering to the travel and tourism industry enjoyed by increasingly wealthy Chinese consumers are in demand, even amid the current market volatility. A BMW dealer in Shanghai said that sales of its high-end cars, too, are strong and the company is ahead of its targets for the year.
Sophisticated demand: The evolving demands of Chinese shoppers are also enabling related industries to expand and become more diverse. For instance, people now look beyond Coca-Cola in favour of newer products, such as energy and protein drinks.
Such segmentation not only provides opportunities for new product lines, but also for businesses in supply chains, such as packagers. E-commerce is bringing more products to consumers, too: the penetration rate of online retail businesses surpassed that of the US in 2012, and online sales are expected to grow from 7.9% of total sales in 2013 to 12.4% in 2017. The impact of e-commerce is particularly high in the consumer goods sector, rising from 51.7% to 56.2% of total consumer good sales between March and December 2014.
Widening the net: But the consumer revolution is yet to truly march on rural areas. There are some signs of increasing consumption in these areas: net income per capita has risen consistently year-on-year and gained 11.2% in 2014, while consumer expenditure per capita in rural areas increased 14.8% between 2010 and 2013.