30 December 2015

China growth is often described as transitioning from an investment driven model to a consumption driven model. While the focus in recent years has been on the investment slowdown (and the resulting drag on global commodities), much less attention has been paid to the other side of the transition – rising consumption and its boost to global product exports. In late November, the Chinese government announced its intention to strengthen its support for consumers by upgrading the domestic shopping service and quality experience. It is our view that mass market consumption will be the focus. If all goes well, over the next few years China may no longer be simply viewed as a constant drag to global growth due to diminishing investments, but a potential boost and new market for many due to rising consumption and further opening up of cross-border e-commerce.

Consumption growth is usually driven primarily by disposable income, which rises gradually, however these reforms may significantly accelerate the pace providing unique opportunities that other markets may not possess.

One child plus one more child: a potential baby boom yielding a 0.5% boost in economic growth

The abolishment of the one-child policy brings with it some impressive projections: 3 million of new births per year, 30 million new entrants to the workforce by 2050 and a 0.5% boost in economic growth over the long term according to the National Health and Family Planning Commission. Higher birth rates will prompt a spur in consumption and service demand related to childbearing and child care – just imagine all the maternity products and services, baby goods, diapers, milk powder that the 3 million pregnant women and newborns per year would need. We would also expect to see an increase in demand for larger homes and additional spending on education.

Soaring overseas spending: the need to bring consumption back home

The China National Tourism Administration estimates Chinese tourists will spend over RMB1.2 trillion overseas this year – a clear demonstration of the increasing spending power of this group. To bring some of this spend back to China, the government first needs to upgrade domestic consumption environment. We believe short term solutions may soon be rolled out. Moves to look for include lowering tax for mass market products to improve price competitiveness against overseas markets, establishing more duty free zones with expanded product categories catering to luxury goods buyers, plugging the grey channel which currently imports goods into China without declaring tax, and enforcing better quality assurance measures, particularly in relation to food safety. Beneficiaries of increased domestic consumption are likely to include retailers and cross-border e-commerce platforms that carry well-known quality international brands, and shipping and logistic companies that are involved in the importing chain.

Regardless, consumers will be the biggest winners, enjoying expanded product choices at cheaper prices. With consumption being brought home, the scenes of long lines of Chinese tourists at VAT refund counters at European airports and tax free lanes at Japanese retailers, as well as Chinese tourists bringing back upscale rice cookers and advanced heated toilet seats from Japan, may soon become things of the past.

China is counting on domestic consumption to bolster economic growth as old economic engines falter. We expect to see rollout of favorable policies in 2016 to improve the consumption environment and to support China’s growth model transition. Over the coming years, China will eventually reassert its role in the global economy as a rising source of demand for consumer products, not just commodities and energy. Those global economies and sectors that can cater to this transformation will surely benefit.

CARS ref: RSM-2766

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 22/12/2015 and may change as subsequent conditions vary.

The China National Tourism Administration estimates Chinese tourists will spend over RMB1.2 trillion overseas this year