How They Spend It In China
by Frank Holmes, CEO, CIO, U.S. Global Investors
February 13, 2013
Would it surprise you if I told you that Chinese visitors traveling through London’s Heathrow today buy about 25 percent of luxury goods at the airport, even though China’s tourists make up less than 1 percent of passenger volume? This buying trend has been influencing the type of goods sold at the terminal, especially during this Chinese New Year.
This is only one example of how Chinese consumerism has significantly changed over the past 20 years. Within the country, more and more residents are relocating to the cities to get higher paid jobs and acquire discretionary income. In addition, government economic, social, rural and welfare policies are influencing the cost of goods. You can see the changes in spending through Jefferies Equity Strategy team’s pie chart comparison. In its special report, “China 2025: A Clear Path to Prosperity,” the research firm compares urban spending across major categories in 1995 versus the spending habits in cities in 2011.
How many times have you seen “pundits” in the media making bold claims that we’re about to have a market correction and that investors should switch from equities to cash? ~ Jeff Hyrich, Invesco Canada
In 1995, “a lion’s share” of Chinese spending was on food; by 2011, this amount decreased to a third of total consumption. In 1995, the second biggest category was recreation, education and cultural, at 9.4 percent, and this increased to 12.2 percent 16 years later. However, in 2011, the second-biggest expense was transport and communication, as hundreds of thousands of migrant workers travel to see their families.
Clothing made up 13.5 percent of spending in 1995, and although the percentage spent in this category dropped by 2011, it still comprised 11 percent, which figures in “economic growth and the influx of global fashion brands and culture.”
To see what consumption spending might look like 12 years from now, Jefferies studied four decades of consumption patterns, spending behaviors and how the retail format has transformed not only in the Asian giant, but also in developed countries. The firm believes that the “Chinese economy is set to enter a ‘post fast-growth’ era where a consumption-driven model is facilitated by accelerated urbanization, enhanced social welfare and fast changes in lifestyle.”
Specifically, spending on basic needs, such as food, clothing and housing, will continue to decline as a percentage of per capita consumption. Luxury goods, on the other hand, will likely “enjoy much faster growth” than other consumer goods, as residents become wealthier and have access to global fashion. Jefferies believes China’s gifting culture along with its business network will be a “resilient platform” for luxury good demand.
As I pointed out to Investor Alert readers last Friday, reforming the hukou registration system will likely have a tremendous influence on China’s economy, and this is especially true in the consumer space. For the China Region Fund, we believe stocks in the consumer discretionary sector will profit from the increasing renminbi in residents’ pockets.