China set for prolonged spending boom

18 August 2010

BEIJING: The "tremendous growth" in consumer spending currently being observed in China is set to continue in the next decade, as the country's economy overtakes that of Japan.

In Q2 2010, Japan's rate of fiscal expansion came in at just 0.4%, while China generated an uptick of 10.3%.

This means that China is now the second-largest economy in the world, behind the US.

"The world will pay more attention to China, especially when most Western countries are mired in the bog of debt problems," Lu Zhengwei, an economist at the Industrial Bank in Shanghai, said.

In terms of market capitalisation, four of the globe's ten most valuable companies - China Mobile, PetroChina, the Industrial & Commercial Bank of China and the China Construction Bank - are headquartered in China.

The ongoing growth in Chinese GDP is also now expected to stimulate a surge in demand across a variety of categories.

"In the consumer market, which particularly interests us, we're seeing tremendous growth," Mark Mobius, executive chairman of the Templeton Emerging Markets Group, predicted.

One driver of this trend, according to James Anderson, chief investment officer at Baillie Gifford, is that increasing salaries may offset the traditional priority given to saving rather than spending.

"Personal consumption has been little more than 35% of Chinese GDP, and historically a sum equivalent to almost a third of this level was recycled via the current account surplus," he said.

"If we are now seeing rising wages … then this warped pattern will gradually erode."

Fidelity's Anthony Bolton further suggested this was likely to result in substantial opportunities for a wide range of industries.

"China's domestic economy will show better growth than most other regions in the world," he said. "I believe many areas in China will show rapid progress over the next ten years."

Among the companies due to profit from new trends are Tencent, the owner of instant messaging service QQ, which boasts hundreds of millions of members and has scope to dramatically extend this audience.

"They are using this base and monetising it, but starting to sell these clients services – such as games. Online gaming is a big thing in China," Bolton said.

"But there are also things like search and retailing, selling goods and services over the internet."

Elsewhere, Hang Lung Properties has shifted its focus away from Hong Kong and to the mainland in a bid to leverage the considerable potential in the retail and business space.

"They are building up shopping centres and office blocks in China. I think this is going to be an interesting area over the medium term," said Bolton.

In the financial sector, firms like CNinsure are ready to tap into growing demand for services, and it should increase its number of agents from 50,000 to 150,000 in the not too distant future.

"Insurance is very under-penetrated in China, so the insurance market is growing quite strongly," Bolton argued.

The fact Chinese universities are in line to deliver more than 500,000 engineering graduates in 2010, compared with 150,000 in the US, could also be a signifier of China's strength as an innovation hub.

A key issue that will need to be addressed by brands is low per capita income, which stands at £2,300 ($3,567; €2,779) in China at present, measured against £24,200 in Japan and £27,000 in the US.

Jim O'Neill at Goldman Sachs has forecast that the size of China's economy will surpass that of the US by 2027, while John Hawksworth, at PwC, predicted this would occur in 2020.

However, Jay Bryson, an international economist at Wells Fargo Economics, believes America will still hold one huge advantage going forward.

"[China] probably will not surpass us for 20 years under current growth rates. But even when they do, they won't be anywhere close to our standard of living," he said.

Data sourced from Bloomberg/Institutional Investor/Associated Press; additional content by Warc staff