China’s economy isn’t showing the astonishing year-over-year growth of years past. Its country’s industrial sector is particularly feeling the pinch. The daily business press seems to alternate between characterizing the situation as dire, and really dire.
Our analysis suggests things aren’t as bad as they sound—especially for Western companies keen to engage the growing Chinese middle class through online channels. (More on this in a moment.) However, there’s no disputing that after more than 40 years of stratospheric growth, China’s economy is no longer supercharged.
To combat the slump—and to help keep tens of millions of Chinese industrial workers employed—the government is making moves to improve growth. On Monday, it recommended incentives for Chinese companies to boost exports. These policy guidelines, including greater bank lending and improved insurance rates for exporters, are intended to reclaim lost ground when exports dropped last month.
A relatively constricted global economy (compared to the past four decades of wild export growth) isn’t helping. Neither is increased competition from other Asian markets.
Indeed, the message from the government’s State Council seemed dire on Monday: “Presently, the foreign trade situation is complicated and severe, elements of uncertainty and instability are increasing, and downstream pressures are continuously growing,” it said.
More bad news: a recent Wall Street Journal investigation revealed that China continues to produce steel, aluminum and other basic industrial goods in an effort to keep unprofitable factories in operation—though this has led to a glut of ultra-low-priced materials on the global market. This is severely undercutting competitors, and creating job losses in other markets, including the U.S.
A recent op-ed in The New York Times by Chinese author Murong Xuecun suggests that China’s middle class is now growing anxious. Local social media networks reflect the fears: The 10 Anxieties of the Middle Class, one topic thread reads. Will the Middle Class Become the New Poor?, reads another.
“Economic insecurity adds to the standing list of worries about daily life that includes pollution and tainted food and water,” Xuecun writes. “…Discussions about how to get money out of the country, or converted into a foreign currency, are common.”
The business press is within its right to breathlessly cover the economic slump. But it’s also fair to remind folks that the Chinese economy still grew at a breakneck pace of 6.9% last year. (In contrast, the U.S. economy grew by 2%, comparing Q1 2015 to Q1 2016. Germany’s economy grew by 1.7%.)
As predicted by many analysts, much of this growth was fueled by consumer spending. Urban household incomes rose by nearly 10% in China last year. The country’s long-term pivot from an industrial-based economy to a higher-value, services-based economy is bearing fruit: the country added 13 million jobs last year, most in the services sector. This exceeded the government’s target of 10 million, Forbes recently reported.
This job growth wasn’t isolated to 2015. The service sector expanded by nearly 8% in this year’s first quarter.
We spoke with Eric Watson, a Global Online Strategist for our Global Growth team, on this topic. Does China remain an ideal market for Western companies to engage and sell to, particularly online?
“Absolutely, particularly when you examine the long-term prospects of the Chinese economy,” Eric explains. “There are several bright indicators, even in the short term.”
For one, consumption is up, Eric says. Chinese retail powerhouse Alibaba will soon surpass Walmart as the world’s largest retailer, thanks to the incredible growth of its Tmall online marketplace and other e-commerce platforms. Chinese consumers spent nearly $500 billion on Alibaba sites and services last year. Its sales rose by nearly 40% in Q4 2015; its profits grew more than 80%.
Much of this growth is “newly increased consumption,” China Daily reported in March. “Online shopping has been an important engine to promote consumption,” an analyst told the newspaper, “which meets the nation’s strategy of promoting domestic demand.”
Beyond Alibaba, the market’s overall retail sales increased by 10.6% in March, slightly above expectations. That growth increased over the 10.2% rate seen in January and February.
“These numbers are impressive, but their significance is greatly magnified when applied to the size of China’s population,” Eric says. “Remember, we’ve only seen a sliver of China’s consumption potential so far. In addition to the quickening increase in retail sales, you can see this potential in the country’s Internet penetration—particularly, in how many people aren’t yet online.”
Currently, only about half of China’s 1.3 billion citizens has Internet access, Eric says. (Developed East Asian countries of Japan and South Korea have penetration rates of 91.1% and 85.7%, respectively.)
Even with an Internet penetration rate of around 50%, this still represents over one-fifth of the entire world’s Internet users. And it’s rising: Internet penetration in China has grown more than 11% since 2013.
Back to China’s middle class for a moment. It’s growing, but is still in its infancy. Only 11% of the population is classified as middle class, according to Goldman Sachs. Even so, Chinese households have aggregate net cash reserves of over $4.6 trillion, Forbes recently reported. The anxieties middle-class consumers are expressing, as seen in the New York Times story mentioned earlier, are actually quite natural and expected, Eric says.
“These concerns are absolutely valid,” he says, “but they’re also exactly the kinds of concerns that you should expect from a radically new population in the country: people who are experiencing an unprecedented level of comfort and consumption for the first time in their lives.”
Taking the long view, it seems almost obvious that the desires of a new Chinese middle class—one that lives almost exclusively in urban environments, demands to purchase international items, and travels abroad with greater frequency—would clash with a political and economic system that’s still adapting to satisfy those appetites. If these citizens fear they’ll soon feel the squeeze of an economic slump, they’ll naturally pipe up about it.
“These claims of instability are likely unfounded mostly because the existing political and economic system is responsible for much of the affluence and growth,” Eric explains. Reports suggest almost half of China’s middle class are employed by government organizations or state-owned companies.
Indeed, as Xuecun observed in his New York Times piece, “They get that the cause of their various discontents is the one-party system, but they also appreciate that the system underwrites their comfortable lives.”
The rapid growth of China’s middle class—coupled with the economy’s decades-long shift to a consumption- and service-oriented economy necessary to fuel that growth—will undoubtedly lead to stumbles and continuing anxieties. Nothing’s perfect, Eric says.
“However, companies considering entering the Chinese market, especially online, need only look at the growth in personal consumption, incomes and changing consumer tastes to realize that a hungry market exists,” he says. “Based on the performance of retailers like Alibaba and the ever-growing Internet penetration rate, it’s clear this market’s consumption has only just awakened.”
The takeaway: China’s economy may not be growing as aggressively as in decades past, a clear result of its pivot from an industrial economy to a services economy. But a growing services sector is driving job creation and consumption. Despite the choppy waters, China remains a smart immediate and long-term bet for international expansion—particularly online.
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