21 October 2016
China needs to take measures to encourage its wealthy to spend more in the country, rather than overseas. Photo: Bloomberg
China needs to take measures to encourage its wealthy to spend more in the country, rather than overseas. Photo: Bloomberg

China must encourage its shoppers to spend more at home

Overseas spending by Chinese tourists totaled 1.2 trillion yuan (US$185 billion) last year, according to data from the nation’s commerce ministry.

Growing online spending and expanding overseas purchasing by agents have led to considerable consumption outflow. Stemming that trend is important for China as its economy has reached a critical point.

It’s estimated that luxury consumption by Chinese consumers amounted to US$116.8 billion, accounting for 46 percent of global total luxury consumption last year. And 78 percent, or US$91 billion, of this has been spent overseas.

Difference in prices between China and other countries is one of the main reasons for the rising spending by mainlanders overseas 

It’s been pointed out that the price gap in alcohol is as high as 85 percent. In another example, international watches are 33 percent to 83 percent more expensive in China than overseas. By contrast, price difference in garments, perfumes, bags and shoes is less than 30 percent.

Meanwhile, the most active shoppers of foreign brands are aged between 25 and 40. Of this, those between 25 and 30 usually buy clothing, shoes and cosmetics, while those in the age group of 30 to 35 usually prefer digital products and bags. People in the 35 to 40 age group favor jewelry, as well as health supplements.

Apart from tax, distribution channel, rent and other operation costs make imported goods far more expensive at home. For example, goods offered in duty-free stores in Hainan are still more expensive than overseas.

In the meantime, the domestic high-end retail sector remains under-developed. Duty-free shops haven’t had much impact in luring the deep-pocket Chinese consumers.

Authorities should fix the issue of consumption outflow from both supply and demand sides. In terms of supply, they should beef up quality supervision and technology of Chinese products. Also, they should reduce direct and indirect taxes and fees levied on the intermediary channels.

In addition, officials should also step up efforts to nurture national brands. In Japan and South Korea, duty-free stores also sell domestic brands besides global big brands.

Chinese New Year holiday is usually the peak season for overseas spending. We’ve already gone through half of the 40-day passenger transport during the holiday break. Informal data suggested that 1.38 billion Chinese traveled by rail, road, air and sea during the period, up 3.3 percent from the year before.

Of this, China’s railways transported 150 million people, marking a rapid rise of 9.1 percent from the previous year. We’ve seen that Chinese are increasingly relying on railways during the holiday.

Big data analysis shows that 80 percent of the railway passengers visit relatives and friends, and 10 percent for tourism. 17.7 percent of holiday makers opted for outbound travel. The top five domestic tourist destinations are Hainan, Guangdong, Beijing, Fujian and Shanghai.

The US dollar has posted sharp falls recently after strong rally earlier. The greenback may struggle to maintain the strength seen over the last two years if the Fed rate hikes lag expectations.

By contrast, the Chinese yuan has managed to stabilize, which would help A-shares. US benchmark stock index is almost at the end of a five-year bull cycle. The cooling sentiment on US equities may help ease capital outflow from China.

Global financial markets have been extremely volatile over the last two weeks. This would complicate the situation for China’s stock markets. Investors should carefully pick the right sectors.

Last year, consumption sector contributed to a significant portion of the GDP growth. The industry will play a bigger role if China manages to stem the consumption outflow.

Meanwhile, the services sector exceeded the factory sector in 2013, after posting robust growth in recent years.

China will see as many as 100 million rural people moving into cities in the next few years. That will unleash enormous domestic demand and help services become a key growth engine for the economy.

This article appeared in the Hong Kong Economic Journal on Feb. 15.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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