Talking points

Can anything stop the march of the Chinese consumer?

Trade tensions between the US and China are a threat, but the superpower’s army of shoppers are unlikely to be deterred

04/10/2018

Alina Gregory

Alina Gregory

Portfolio Manager

China’s car market is now the largest in the world. Its consumers are the biggest spenders on luxury goods, and it has recently overtaken the US to become the world’s leading consumer of smartphones. With the latter comes the accolade of hosting more e-commerce activity than any other country in the world.

The significant demographic trends of China have been playing out for some time. Since 2011, consumption has been the single biggest driver of GDP growth. It is estimated that by 2030, China’s middle class (defined as those households with an annual disposable income between $10,000 and $65,000) will grow to 1.1 billion – that’s a compound annual growth rate of 3% – and their annual spending will grow by 5% per year.

By contrast the “affluent” class (households with disposable incomes above $65,000), although smaller in number, is expected to grow even faster and spend even more, so that by China’s unstoppable consumer megatrend 2030 they will represent 15% of total spending, up from just 5% today.

But how much further can this megatrend run? To understand how China became the global consumption powerhouse that it is today, it is helpful to look at where it all began.

The Chinese switch to digital has involved jumping straight to mobile

For the Western world, the rise of online shopping in the 1990s forced retailers to work hard to shift their customers from traditional physical stores to newly created digital ones. But in China’s case, the digital revolution coincided naturally with rapid urbanisation and rising disposable incomes.

So, while consumers in the US, UK and other developed nations have undergone a slow and steady period of digital transformation over the last 15 years, China essentially leapfrogged the computer age so that its inhabitants’ lifestyles, social interactions and shopping preferences landed straight in the mobile world. By 2015, China’s e-commerce share of retail had pulled ahead of the West’s – despite overall internet usage still lagging behind.

SOURCES: GS, EUROMONITOR 2018

China’s unique demographics stimulate aspiration and consumption

China introduced the “one-child” policy in 1979 and it stayed in place until 2016, when it was relaxed to a two-child policy. There has been speculation that it could be relaxed further. Limiting the number of births, along with an increase in longevity, has inverted China’s demographic pyramid. There are, in theory, four grandparents and two parents for every one child born between 1979 and 2016. With up to six adults saving for one child, spending needs go beyond consumer products to make education, and later housing, priorities. The pressure is on for China’s so called “little emperors”, who are not only encouraged, but expected to get into good universities, become successful in their careers and get married so that they can create “little emperors” of their own.

“Singles’ Day” – an annual occasion for individuals to celebrate their single status – has come a long way since its launch in 1993. Thanks to e-commerce giant Alibaba the day is now the world’s biggest shopping event. In 2017, the day (11th November) generated a record $25.3 billion in sales, roughly 90% of which originated from mobile phones. Transactions peaked at 256,000 per second.

A typical millennial born in the US has seen GDP per capita increase by around two and a half times over their lifetime so far. In China however, someone of the same age will have seen GDP per capita rise a staggering 25 times. This societal move from rags to riches has led to an increased focus on money and materialism. The typical Chinese teenager can identify 20 cosmetics brands, compared to the average American teen who can identify just 14. It is this level of brand consciousness that makes it all the more difficult for new entrants to penetrate the retail space.

Tourism and travel is perhaps one of the most obvious beneficiaries of rising disposable incomes. The growth in Chinese outbound travel has also managed to receive a helping hand from other factors, such as the simplification of the visa application process. Just one trip to the visa office is now required to travel, and most regions allow submissions to be made online, whereas previously paperwork and multiple visits were the norm. The demand for travel is already there and considering only 8% of the Chinese population currently have passports compared to 46% in the US, for businesses such as Ctrip, China’s leading online travel agency, there is plenty of growth to go after.

An issue of concern to some commentators is the rising level of personal debt. Yet Chinese consumer credit – which is mostly made up of mortgages and credit cards – is modest by comparison with developed markets. The per capita debt-toincome ratio is only 37%, compared to 87% in the US, for example – suggesting consumer borrowing has room for further growth.

SOURCES: ECONOMIST INTELLIGENCE, INTERNET WORLD STATUS, INTERNATIONAL TELECOMMUNICATION UNION, WORLD BANK, EUROMONITOR, BCG ANALYSIS

The Chinese venture capital juggernaut is gaining momentum

In 2017, the US in aggregate invested $74 billion in over 5,300 venture capital deals, a mighty year-on-year growth rate of 17%. China is quickly catching up, having invested $71 billion into 2,800 deals in 2017, demonstrating a growth rate of 50%. With intellectual property between these two superpowers a high stakes game, China has emerged as one of the most vibrant venture capital markets in the world.

“Unicorns” (the name given to private companies which, when outside investors start to participate, have an initial valuation of more than $1 billion) are numerous in China, and well-known public companies are not shy to take a slice. Ant Financial, the financial arm of Alibaba that operates Alipay, for example, is valued at $75 billion; while China’s biggest gaming company Tencent has stakes in 27 Chinese unicorn companies.

The burgeoning middle class in China is one of the most significant megatrends shaping the emerging markets. Demographic and cultural shifts, along with astonishing technological innovation – much of which is actively encouraged by the machinery of state – all provide the structural tailwinds for this megatrend to continue.

Author

Alina Gregory

Alina Gregory

Portfolio Manager

Alina is a Portfolio Manager and joined through the Graduate Programme in 2014 after reading Economics with French at Durham University. She holds the Investment Management Certificate and is a CFA charterholder.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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