China: still reasons to be cheerful

China’s economy has been characterised by two key themes over the past two decades, but what will be the theme for the coming ten years?

Exports was the key theme in the 2000s. China started that decade as a WTO outsider and grew to become the world’s biggest exporter by the end of it. Public investment was the theme for the 2010s. In 2010, high speed trains were close to non-existent in China, yet today China owns two-thirds of the world’s high-speed railways by length.

In an analysis, Deutsche Bank’s China economist Yi Xiong has looked ahead to the 2020s to determine the theme that will set the tone for the world’s most important shipper and consumer. With exports losing momentum after the global financial crisis and investment dropping off in 2018, Mr Xiong pits ‘consumption’ as the theme for the 2020s.

Consumption growth in China has, to date, been relatively stable. “Despite the ups and downs in economic cycles and the structural slowdown since 2010, China’s consumption spending per person has grown 8% per year, in real terms, in each of the past four decades,” notes Mr Xiong.

As a result, China’s share of world consumption spending increased from 2% in 1980 to 12% in 2018 in dollar terms, or 14% if adjusted for purchasing power differences. “That puts China on track to become one of the world’s biggest consumer markets before the end of the coming decade.”

That said, Mr Xiong believes that it is “inevitable” that consumption spending will slow at some point in the future and draws on the examples of previous fast developing East Asian economies: Japan’s consumption growth halved in the mid 1970s, while Korea’s consumption growth fell sharply in the late 1990s.

“A quick glance at Chinese data makes some believe that China is now approaching that same point,” Mr Xiong notes. “China’s real per capita GDP ($7,700 in 2011) is already about the same as was Korea’s in the late 1980s and Japan’s in the mid 1970s.”

Positive outlook

But there are two reasons to remain optimistic about China’s continued potential to provide cargo for global trades. The first is that China is large and there are vast income and spending gaps across different regions in China. In the majority of Chinese cities the average annual income is between $4,000-$5,000 per year; that lags top tier cities such as Shenzhen and Shanghai by about a decade. This means that income and living standards out of the main hubs are embarking on a fast track to improvement from a relatively low level.

The second factor is that Chinese households are saving too much, according to Mr Xiong. They save about a third of their income which compares with approximately 4% savings for an average OECD country.

“If you look at China’s GDP, only 30% is used for household consumption. In Korea and Japan that is about 50%-55%, so much higher than in China. This still leaves great potential for households in China to consume more by reducing their savings.”

Add to this the large proportion of the population coming up to retirement and the future draw down on savings will be pronounced, which will increase spending on consumption. “China’s younger generation are already exhibiting a preference for consuming more and saving less – a stark difference to their parents,” Mr Xiong adds.

Given the above, Deutsche Bank is confident that China’s economy is not heading for a hard landing. With no large economic shocks expected, Mr Xiong says that a consumption slowdown only becomes likely if China runs into an economic or financial crisis. And then even if China’s consumption growth starts to slow, it will likely still grow faster than consumption elsewhere around the world. “Therefore, China will continue to grow its share of the global consumer market,” he said.

Trends for the 2020s

There are some more key trends to watch out for in China in the 2020s when it comes to driving global trend. First is the country’s silent majority. More than 60% of Chinese citizens live in the lower tier of rural areas in China and have, up until now, been largely invisible to China’s consumer market. “What we seeing is that they are increasingly going online for shopping and they are becoming an increasing group of customers.” E-tailers are already tapping into this promising market. Mr Xiong gives the example of Pinduoduo, which was founded in 2015 and by 2018 had become China’s third-largest ecommerce platform. Its USP was targeting consumers in lower-tier cities and rural areas. “One thing is clear: whoever is best able to tailor products to this silent majority will succeed in the next decade,” Mr Xiong said.

Second, backed with better education than previous generations, China’s baby boomer generation has been gainfully employed over the past four decades throughout China’s rapid growth. “In other words, they rode the tide of China’s growth and benefited from it,” said Mr Xiong. Statistics show that this generation is the richest in China today. “They will retire young and healthy at around 55-65, in the next decade, and they will have time and money to spend.”

All told, there are many reasons to remain upbeat about China’s economic prospects over the coming decade, lending support to demand for shipped goods from 2020 and beyond.