Chinese spending power has been underestimated

13 August 2010

BEIJING: Consumers in China may have greater spending power than is typically assumed, offering substantial opportunities for brands in a number of sectors.

Credit Suisse, the investment bank, sponsored research by the China Reform Foundation seeking to identify the influence of the grey market in the country.

A survey comparing earnings and spending patterns across 4,000 samples in 19 provinces suggested that per-capita disposable income stood at 32,154 yuan ($4,739; €3,698; £3,039) in 2008.

This figure was 90% higher than official estimates, equivalent to a "hidden income" of 9.3tn, or 30% of gross domestic product.

Indeed, the increase in "hidden income" apparently outstripped the expansion of the economy as a whole in the recent past, having doubled in size from 2005-08.

Efforts by the Chinese government to raise salaries can be explained in this way, and should contribute to a boom in consumer expenditure, Credit Suisse said.

Professor Wang Xiaolu, the author of the study, also revealed that 63% of unrecorded assets are attributable to the top 10% of urban households.

Members of this demographic had the widest difference between their actual earnings and the government's statistics, with the former total 3.2 times greater than the latter, climbing to 144,000 yuan in all.

The divergence for the next 10% of the population was 2.1 times higher, with these two cohorts taking 80% of all unreported capital.

As such, it was argued that the manufacturers of premium brands stand to receive particularly impressive gains.

"Chinese property, European luxury goods, high-end retailing and Macao gaming could be the biggest beneficiaries of the current income distribution pattern," said Credit Suisse.

"We think BMW, Galaxy, Hang Lung Properties, Swatch, Mengniu and Vanke will benefit most."

The household savings ratio also increased to 52.4%, 14.3% above than official estimates, with the national equivalent rising by 4.5% to 56% on the same measure.

Among households with an income of at least 400,000 yuan the savings ratio reached 63.4%, falling to 51.2% for those with earnings below this amount and above 75,000 yuan a year.

By contrast, families and individuals with annual budgets of less than 7,000 yuan posted a figure of -22.7%, with their counterparts in the 7,001 yuan and 10,000 yuan range on 8.8%.

Elsewhere, the report showed that the gap between the richest and poorest citizens in China is of a more severe magnitude than previously stated.

"While we think that the Chinese government will try to reduce this huge income disparity problem and the size of grey income, this is not likely to change significantly in the near future," Credit Suisse said.

Wang's overall recommendations included boosting wages and reforming the national tax system, especially to enhance the affordability of property and close the wealth gap.

Data sourced from Credit Suisse/Wall Street Journal; additional content by Warc staff