China's rebalance to a consumer economy is grinding along. At the heart of many of Beijing's recent reforms is the effort to roll-back decades of forcing households to subsidize rapid industry and infrastructure at the expense of consumption. If overall growth does not collapse, China's consumers will keep growing. By the numbers, China's consumer boom has massive potential. China's household consumption in 2014 made up 37.7% of its economy, a long way off from economic peers in Asia. Consumption moving to a share of the economy closer to other Asia EM peers, such as Korea with around 50%, would require $1.3 trillion USD. $1.3 trillion is just under the size of the entire economy of Spain. The potential for growth is significant, as long as China's overall economic growth - especially the rapid job creation engine service sector - does not completely collapse and crush income growth.
McKinsey & Co is estimating that mainstream consumers, described as the standard setters for consumption, capable of affording cars and all manner of consumer goods, will rise to 167 million households by 2020, from just 14 million in 2010. Affluent households are expected to rise to 20 million by 2020 from just 4.5 million in 2010.
Rebalancing to consumption is taking place in 2015
Within China's numbers we can observe the rebalancing. Real GDP is probably growing around 6.5% this year. Industrial production is running around 6.1% growth. Retail sales outpaced these numbers, growing at 10.8% in August, 10.4% on a real basis. Healthcare & pharma, furniture, appliances, and jewelry are growing in the double digits. Online sales grew around 50% from last year. And, retail numbers understate consumption because rapidly growing service consumption is not included. Even with the economy slowing, firms like Nike and Starbucks are reporting stellar growth in China this year. As industry slows, consumption is holding up well.
Chinese consumers won't boost global growth for some time
But, don't count on Chinese consumers to replace the hole in global demand left by declining demand from China's once rapidly growing industrial and construction sectors. China's industry and construction sectors drive demand for commodities and industrial machinery, the economy's primary imports.
China, being the main producer of the world's consumer goods, needs few imports from the rest of the world. By my calculation, using 2013 data from the National Bureau of Statistics of China, only 2% of China's total imports are consumer goods. Roughly 5% of all imports are edible agricultural products and foodstuffs. Another 5% of imports are all vehicles to transport people; planes, trains, and autos. The rest of China's imports are primarily meant for its massive industry and construction. As you can see from the maps below, shipments of consumer goods to China are not as significant to the rest of the world in comparison to all of China's imports.
As consumption grows, perhaps its demand for consumables from around the world will grow. But, recent data shows that China's consumption is growing more domestic-oriented. According to a 2014 study by Bain & Co, covering 40,000 households, foreign brands are losing share across a broad category of products. Overall, 60% of foreign brands lost market share across the consumer market.
China manufactures a massive amount of the world's consumer goods, and productivity growth along with supply chain efficiency will keep manufacturing in China for some time even as wages grow higher than some peers in the region. According to McKinsey, labor productivity in China rose 11% a year between 2007 and 2012, compared to 8% in Thailand and 7% in Indonesia. And, automation in China is driving forward. In 2013, China became the biggest market for industrial robots. Rising wages will some day potentially make imported consumer goods more attractive, but that trend is years away. It will be a while before China's consumers can meaningfully lift world growth and offset the effects of its declining industry juggernaut.
