Reports of the death of the Chinese consumer greatly exaggerated

One of the more intriguing side stories of the economic volatility of the past year has been the uncertain growth story in China. Once heralded as the can’t miss saviour of the world in the absence of Europe and the United States, China has instead had to wrestle inflation, weakness in manufacturing and concerns that its consumer base has not awakened as expected.

However, new research suggests that consumption growth in China has been significantly understated, Yiping Huang, managing director and chief economist, emerging Asia with Barclays Capital, said in a report.

“We find that consumption is being underestimated in China and that rebalancing is already taking place, heralding a great wave of consumption upgrading over the coming decade,” he said.

Key to this conclusion is the murky nature of Chinese statistics when it comes to GDP and CPI data.

This includes gaps between real growth in retail sales and stated consumption spending in GDP data, potential underreporting in tourism spending, accurate information on housing spending, as well as studies on possible hidden household income.

As a starting-off point, the team looked at 2008, when it was estimated that consumption was underreported by 20%. Based on this, official reports of total consumption share of GDP at 48%, including consumer consumption at 35%, would be bumped up to 50% and 38.2% of GDP, respectively.

Based on official and unofficial sources, the Barclays research team then extrapolated various scenarios for the following years implying consumption underestimation of between 10% and 30%.

The team found consumption share was consistently higher than the official share, and that while consumption share was continuously declining before 2008, it already began picking up after that time.

“The official statistics overstated the weak consumption problem,” he said. “These findings imply that rebalancing of the Chinese economy has already started.”

While it’s possible that the improvement of the past few years is temporary and owing to stimulus, Mr. Huang cites important fundamental changes in China, including rising wages and rapidly improving investment returns.

“We expect a dominant theme in the coming years to be consumption upgrading, alongside the likely pickup of consumption growth,” he said. “While the luxury goods market will continue to grow at a fast pace, we think mid- to high-end goods could grow at an even faster pace.”

Based on past consumption patterns, as the middle class expands habits will change. As income rises, expenditure shares on necessities such as food will decline sharply in favour of more expensive services, higher-end appliances and products, as well as leisure and entertainment.

The same can be said of the past experiences of other Asian countries at similar stages of development. Both South Korea and Taiwan encountered comparable turning points 20 years ago and saw their consumption patterns change significantly in the following decade.

“They generally confirmed the consumption upgrading story that we propose for China: less spending on food and beverages and more spending on household facilities, healthcare, culture and recreation,” he said.

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