China’s economy grew 6.9 percent in the third quarter, marking its worst performance in six years.
While the overall economy is sluggish, increased spending on consumer products has become a bright note in an otherwise disappointing set of data.
In September, retail sales of consumer goods surged 10.9 percent from a year ago. In the first three quarters, this segment contributed 58.4 percent of the overall gross domestic product growth, up 9.3 percent year on year.
If the mainland economic situation is weak, why is consumption still growing?
The downtrend in China’s economy is an obvious fact. All my friends — regardless whether they are factory owners, property developers, exporters/importers or even private equity managers — haven’t stopped complaining about how hard business is recently.
Home prices have stopped increasing. The vacancy rate of residential flats in some third- or fourth- tier cities is over 50 percent.
Although less people go to department stores, mainland people still have money in their pockets. It is the consumption patterns that changed.
When consumers feel uncertain about the economic outlook, they tend to become more prudent.
For example, if they find something desirable in the physical stores, they may buy it from online stores such as Taobao.com where the price is usually cheaper.
How many of China’s 1.3 billion people have money to spend? According to a study by Credit Suisse, in terms of purchasing power parity, about 109 million Chinese have wealth worth US$50,000 to US$500,000, who are also been defined as the middle class, surpassing the 92 million in the United States.
To identify investment opportunities in mainland’s consumer products market, one should keep in mind that consumption patterns and the corresponding consumer groups are ever changing.
Let’s see what happened in Hong Kong. Since 2003 when the mainland government launched the individual visit scheme, popular products sought by mainland visitors to Hong Kong changed from luxury products to daily necessities such as medicines.
They are still spending, but the behavior pattern has changed.
In the past five years, the renminbi appreciated by 20 to 40 percent against the euro, yen and Australian dollar.
Meanwhile, the money Chinese visitors spent overseas soared to US$165 billion in 2014 from less than US$50 billion five years ago.
During this year’s Golden Week (Oct. 1-7), about 400,000 mainlanders visited Japan, spending US$830 million.
Major cities all around the world are welcoming the Chinese, which means that what Hong Kong lost went into other countries’ pockets.
On the other hand, not all of China’s middle class can afford to travel overseas. More than 520 million Chinese opted for domestic destinations during the Golden Week.
Aside from tourism, other noteworthy growth engines include healthcare, entertainment, education and asset management.
This article appeared in the Hong Kong Economic Journal on Oct. 22.
Translation by Myssie You
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