Consumer Spending

Total consumer spending grew from 5.6 trillion Yuan in 1997 to 9.2 trillion Yuan in 2003. The five items that accounted for most of the spending were food, education and entertainment, clothing and foot wear, housing, and household durable goods. Food was the biggest item, consistently more than 40 percent of the total (Table 3.2). Food spending was 41.2 percent of all consumer spending in 2003, down from 47.9 percent in 1997. The decline was expected because as the economy grew, the consumer had more discretionary spending power. Among the key spending items, housing enjoyed the biggest jump, from 7.6 percent to 10.1 percent. Medicine and health care rose slowly from 3.8 percent of total spending to 5.5 percent during the same period. Household durable goods increased from 7.4 percent to 8.6 percent. Transport and communications rose from 5.2 percent to 6.7 percent while services increased slightly from 4.4 percent to 4.8 percent.

As spending in housing rises, consumers spend more on household electronics and appliances. Most households have color televisions, washing machines, and

TABLE 3.2 Consumer Spending Share from 1997 to 2003 (Percent)

Item

I997

I998

1999

2GGG

2GG1

2GG2

2GG3

Food

47.9

45.9

44.0

43.0

42.6

4I.5

4I.2

Medicine/healthcare

3.8

4.3

4.6

5.2

5.I

5.4

5.5

Clothing/footwear

I4.0

I2.5

II.3

II.2

II.I

I0.5

I0.4

Household durables

7.4

8.I

8.8

8.5

8.4

8.7

8.6

Transport/communications

5.2

5.6

6.0

6.2

6.4

6.6

6.7

Education/entertainment

9.8

I0.7

II.4

II.9

I2.I

I2.6

I2.7

Housing

7.6

8.5

9.3

9.4

9.6

I0.0

I0.I

Services

4.4

4.5

4.6

4.7

4.7

4.8

4.8

Source: Deloitte, "China's Consumer Market: Opportunities and Risks." February 2006.

Source: Deloitte, "China's Consumer Market: Opportunities and Risks." February 2006.

refrigerators. A large and growing number of Chinese, especially the younger generation, are technologically savvy and have access to the most recent information. These young people are an important target for global companies interested in China. Many are starting to enjoy the convenience of automobile ownership. The growth of the automobile market suffered a temporary setback when the default rate for automobile loans ran as high as 30 percent. Chinese traditionally use cash to purchase automobiles. Automobile financing started just recently. As credit becomes more available, it will make automobiles, a big-ticket item, more affordable.

Home ownership is on the rise, aided by the availability of consumer credit. Until recently, consumer transactions were overwhelmingly on a cash basis. Most consumers did not have debt of any kind. This has changed. Since 2001, the markets for mortgages and automobile loans have developed. Main forces contributing to the development of the mortgage market are housing privatization and bank's diversification of loan portfolios. Banks expanded to mortgage lending to improve their asset mix. Estimates suggest that consumer loans accounted for roughly 10 percent of bank loans in 2004 and 90 percent of which was mortgage lending. Default rate in mortgages is low, hovering around 2 percent to 3 percent, which is much lower than that of automobile loans that hit as high as 30 percent.

Housing privatization will contribute to domestic demand. First, the perception of wealth will influence consumer spending. As housing prices rise, homeowners' wealth increases. Greater wealth increases spending. In addition, homeowners spend more on their homes, from paint, furniture, electronics, to appliances. Thus, spending on home-related goods is expected to rise along with housing privatization.

Demographics are among the most important factors foreign firms should consider in planning their China strategies. The inequality in income and living standards corresponds to geographic differences. Major costal cities such as Beijing, Shanghai, Guangzhou, and Shenzhen are very affluent. There are also geographic differences in the way the Chinese people spend their money. People in Shanghai, for example, spend more on housing, food, services, and communication than those who live in Beijing or Guangzhou. China is also a diverse nation, with many languages and lifestyles. Foreign firms should take into account those differences in product offerings and in managing local employees.

The one-child policy has slowed population growth. The U.S. Census Bureau has projected China's population to increase from current 1.3 billion to 1.45 billion by 2025. As Table 3.3 shows, the under 20 population will drop by 12 percent over the next 20 years. The number of young adults (20 to 34) will decline by 13 percent. On the other hand, adults in the age group of 34 to 59 will increase by 20 percent. It is interesting to note that males consistently outnumbered females in every age group up to the age of 69 in 2005. Starting at age 70, the population mix reversed. This suggests females enjoy a higher life expectancy. In 2025, the male population is expected to be still more than the female population up to the age of 59 and then the mix reverses starting at age 60.

TABLE 3.3 Midyear Population by Age and Gender: 2005 and 2025 (Million)

Age

200S

202S

Total

Male

Female

Total

Male

Female

I,306,3I4

672,7I7

633,597

I,453,I24

738,940

7I4,I84

0-4

82,I75

43,792

38,383

8I,227

4I,757

39,470

5-9

93,898

50,053

43,845

90,685

46,840

43,845

I0 -I4

I03,I08

54,290

48,8I8

95,58I

49,853

45,728

I5-I9

I24,6I3

64,833

59,780

87,453

46,029

4I,424

20-24

I0I,864

52,482

49,38I

80,393

42,655

37,738

25-29

94,483

48,4I6

46,067

9I,395

48,367

43,028

30-34

II7,304

60,098

57,206

99,836

52,090

47,746

35-39

I23,620

63,438

60,I82

I20,687

62,2I9

58,468

40-44

I0I,383

5I,8II

49,572

98,338

50,I76

48,I62

45-49

80,750

4I,774

38,976

90,924

46,I45

44,779

50-54

8I,948

4I,867

40,08I

II,734

56,6I2

55,I2I

55-59

58,79I

30,304

28,487

II5,I32

58,I5I

56,98I

60-64

43,092

22,I58

20,933

90,9I7

45,302

45,6I5

65-69

36,773

I8,678

I8,095

67,I67

33,296

33,87I

70-74

29,I4I

I4,264

I4,877

6I,284

29,2I3

32,07I

75-79

I8,540

8,579

9,96I

36,357

I6,769

I9,588

80-84

9,742

4,089

5,653

I9,23I

8,289

I0,942

85-89

3,833

I,4I3

2,420

9,948

3,790

6,I58

90-94

I,062

33I

73I

3,823

I,I74

2,649

95-99

I78

43

I36

884

I96

688

I00+

I7

3

I4

I28

I7

III

Source: U.S. Census Bureau, International Database, 2005.

Source: U.S. Census Bureau, International Database, 2005.

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