Analysis:
China consumers counter
economy gloom with travel boom
BEIJING | Sun Aug 12, 2012 5:39pm EDT
 |
Nanjing Road, Shanghai
Photo National Geographic |
(Reuters) - Soaring
numbers of Chinese tourists packed onto flights out of the country is a sure
sign that a fast-growing consumer class of around 130 million is not worried
that the likely slowest year of economic growth since 1999 will sap their
spending power.
Nearly 39 million
mainlanders left China on
overseas trips in the first half of 2012, roughly double on five years ago and
evidence that a powerful consumer force - envisaged by the top leadership as
the engine of economic expansion in a generation to come - may be bulking up
faster than thought.
The question for
investors is if a burgeoning bourgeoisie is now big enough to fully offset the
economic impact of faltering foreign demand evident in data last week, when
undershoots in July new bank lending, export, import and industrial output
growth prompted analysts to start slicing into GDP forecasts.
Paul French,
Shanghai-based chief China strategist at market intelligence consultancy
Mintel, says the purest view of the domestic economy's health always comes from
the consumer.
"If consumers feel
good about things they'll spend. If they don't feel good they'll stop," he
told Reuters. "Travel is a good indicator because people are travelling
more and they are consuming a lot when they travel abroad."
Investors, facing world
growth slowing to levels economists define as marking a global recession, are
anxious for any sign that critical consumer mass may have already arrived in
China.
Consumer spending in
China has comfortably enjoyed double-digit growth for a decade, while exports
have slowed to become a net drag on the economy in 2011 and in the first half
of 2012.
Retail sales rose 13.1
percent year on year in July. Adjust for inflation and it was the second best
month of the year.
But that's not been
enough to arrest six straight quarters of slowdown, with the latest Reuters
poll forecasting economic growth to slide to 8 percent in 2012 from 9.2 percent
in 2011.
While well below the 10
percent average of the last 30 years and a level that has previously prompted
urgent action to create jobs, 8 percent remains above Beijing's 7.5 percent
target.
Meanwhile the labor
market appears tight, with data showing the ratio of vacancies to workers near
its highest in 10 years.
STRONGER, FASTER
Evidence that consumers
are rapidly getting stronger comes from the Geneva-based Digital Luxury Group,
which reckons China's travel market is already worth some $232 billion.
Its new World Luxury
Index China Hotels report says Chinese travelers made 70 million overseas trips
in 2011 to be pampered at spa resorts in Bali, to shop in Dubai, Paris and
London, and to spend in Singapore and Hong Kong.
International Air Travel
Association chief executive, Tony Tyler, says airlines will see an extra one
billion travelers in a decade if average annual incomes in China hit $15,000.
Part of the proof is in
the building going on. China, IATA says, plans to build 56 new airports
nationwide before the end of 2016, with a further 16 relocated and 91 being
expanded.
Chinese carriers made
about half of all the $7.9 billion in profits earned by the global airline
industry in 2011, according to IATA, which expects international traffic growth
of 8-9 percent from China in the five years to 2015.
A Beijing-backed World
Bank report envisages per capita income rising to $16,000 by 2030 from about
$5,000 now, with two thirds of economic activity forecast to come from domestic
consumption against less than 50 percent now.
CONSUMER CUSHION
A shift to the domestic
market, leveraging China's 1.3 billion-strong population, would cushion the
economy from huge falls in foreign demand that Europe's debt crisis is causing,
barely three years on from the trade shock it suffered in the 2008-09 global
financial turmoil.
An emerging urban middle
class has made grocery shopping the engine of domestic retail sales growth,
taking in 41 percent of all retail spending in China which analysts at Citi
reckon will be up 55 percent up over five years to $600 billion in 2012.
Annual double digit wage
rises over the last decade - the government has decreed minimum wages rise at least
13 percent in the five years to 2015 - have helped China create what brokerage
CLSA says is "the world's best consumption story".
But while workers in the
world's second largest economy are earning more, they lag well behind those of
the United States.
Average annual wages in
the state-owned firms which dominate economic output were 42,452 yuan ($6,700)
in 2011 and just 24,556 yuan in the private sector which creates some 75
percent of the country's jobs. The U.S. average wage was $39,959 in 2010, according
to the latest data available.
China's wealthy elite,
however, have generated a whole new market for the world's luxury personal
goods makers, estimated to be worth $25 billion a year now and likely to
leapfrog Japan and
the United States to the $28 billion top spot by 2015.
It indicates a consumer
market presently polarized between the super rich and a middle-class with
modest discretionary spending strength, but growing rapidly in size and
affluence.
It is one reason why
Yolanda Fernandez Lommen, head of the economics unit at the Asian Development
Bank's China mission, says a self-sustaining consumer class is some way off.
"We consider that
10-15 percent of the population shows a consumption pattern that is consistent
with the type that would be regarded as a solid domestic driver of
growth," she said.
"In general,
economies where consumption plays a meaningful role as a driver of growth
entail a wide middle class that on average comprises about 70-80 percent of the
population."
AFFLUENCE ARRIVING
China officially classed
51 percent of its citizens as urban dwellers in 2011, but that includes some
230 million rural migrant workers who generally do poorly paid jobs in cities,
lack residency rights in them and have very little to spend.
Only deep structural
reforms will turn those migrant workers into fully-fledged urban consumers,
Fernandez Lommen said.
Analysts at consultancy,
McKinsey, say affluence is arriving faster than many economists anticipate,
forecasting a giant leap by 2020 based on annual surveys it has carried out
since 2005.
By then China will have
167 million "mainstream" consumer households - those with annual
disposable income of between $16,000 and $34,000 - more than 10 times the 14
million, or 6 percent, who currently fit that definition.
There will also be 120
million households with $6,000-$15,999 of spending power, according to
McKinsey.
Analysts at Nomura point
out that domestic consumption contributed 4.5 percentage points of the 7.8
percent growth in China in the first half of 2012.
All of which implies
consumer strength underpinning activity - and the confidence Mintel's French
says his clients have in the spending power of China's shoppers at home and
overseas.
"The only thing
we're seeing slowdown in is some softening in the higher end numbers for luxury
goods. But the reason for that is because we have got unparalleled amounts of
arbitrage going on from the Chinese going abroad and shopping," he said.
Peter’s
Comment
It proves the old adage, it’s made round to go round.
China and India, traditionally countries of large population
and widespread poverty are emerging as the economic power-houses of the
twenty-first century.
Watch out also for Nigeria with its population of 170
million, huge resources and rapidly expanding technology industries.
