Analysts and party leaders are calling for a need to rebalance China’s development toward a consumption-driven economy, and move away from investment-led growth, which has slowed. Despite the gradual increase in number of China skeptics, we are confident that China remains the fastest growing consumer market in the world.
A recent McKinsey report argues that consumption in China has grown faster than almost any other country on an absolute basis, growing from approximately $0.9 billion in 2003 to $4.8 trillion in 2013. This represents a compounded annual growth rate of nearly 20%. McKinsey also speculates that it is likely that many Chinese subsectors underreport growth. For these reasons, China watchers should really focus on household income, where the outlook is even stronger. China’s household income currently stands at more than $5 trillion per year, and its workforce has seen double-digit wage growth for the past decade. In the past five years alone, the minimum wage in many cities has doubled. Additionally, supplementary income remains underreported, meaning that household income is likely higher than the official figures.
The sheer scale of new consumers that China’s growth is creating is staggering. The number of households in China with annual income greater than $2,500 is more than that of India, Brazil, Mexico, Russia and South Africa combined when adjusted for purchasing-power parity. Additionally, there are further consumer tailwinds, such as wealth appreciation from the rally in China’s domestic stock market and value of real estate. These rallies normally lead retail sales growth 5-9 months in advance. Consumer credit is also growing, with bank loans to households rising around 20% since 2009.
Most relevant to our investment strategy, the growth in spending is expected to be concentrated in discretionary spending and in semi-necessities. Purchases of luxury items or vacations are expected to rise 7% between 2010 and 2020, and 6% to 7% for semi-necessities, such as apparel and household products, over the same period. Per-household consumption of apparel alone is expected to grow by around 13% per year, and personal care products have seen almost 50% of their growth attributed to those consumers who are trading up. Moreover, consumers are increasingly willing to accept price hikes for quality goods. Simply put, Chinese consumers are willing to spend on items they want. Our portfolio is well positioned to benefit from these tailwinds. Joysun is serving customers who have an increased willingness to pay for healthy drinks, while our baby and children’s apparel businesses, Yeehoo and IPP, have seen customers line up for premium clothing.
We continue to strengthen our ability to capitalize on China becoming the next great consumption superpower. While economic growth is rebalancing, and skeptics are voicing concerns, we are confident in our long-term view, ability to find good businesses, strategy of professionalizing management, and potential to grow revenue and earnings, ultimately resulting in value for our investors.