China's Consumers Are Still Spending

This article originally appeared in BusinessWeek.

Despite the slowdown in China's economy, consumers plan to open their wallets more in 2009, especially for entertainment and education.

The economic news coming out of China sounds dismal. Twenty million job losses. Ten thousand factory closings. Sputtering exports. Foreign direct investment receding fast. Even normally tight-lipped government officials have warned about social unrest. There are some reasons for optimism: Chinese banks opened their spigots and increased lending to an astounding $237 billion in January and another $157 billion in February. The stock market has rebounded 35% since the beginning of the year, and February sales grew 25% after the government announced tax breaks for cars with small engines. But the weak export sector continues to hurt the economy.

As China struggles with the global recession, one key issue for multinationals is whether Chinese consumers can make up for the shortfalls from declining exports. In the U.S., before the crisis crimped consumer spending, consumers accounted for 71% of consumption; in China consumers make up only 33%.

That Chinese number is likely to grow, despite the slowdown in China's economy. In interviews my firm, China Market Research Group (CMR) conducted with several hundred consumers in 10 cities in January and February, 60% said they expected to spend more in 2009 than in 2008, except for the real estate and auto sectors, with the highest spending increases coming in entertainment and education. Nearly 80% of respondents had full confidence the government would implement policies needed to right the economy within the next three years.

Opportunities Remain

This optimism fueled 15% growth in retail sales in January and February. China's 250 million-strong middle class is still consuming, and opportunities remain in China for multinationals to take advantage of weakened competitors and move to the front of the pack by focusing on the right consumer targets and the best marketing communication strategies.

Our research shows that the Chinese population between the ages of 22 and 28, and women under the age of 35, remain the most optimistic consumer segments. Unlike in the U.S., where consumers have lost confidence and seen sharp decreases in their net worth, younger Chinese have little if any money invested in stocks and real estate. Even older consumers remain confident. Despite recent declines in real estate prices, their homes remain above water since they put 30% to 50% down on their mortgages in the first place. In addition, the stock market is still higher than it was a couple of years ago, and the government has announced it will help reform the health-care system.

While consumers are cautiously optimistic about the strength of China's economy and are continuing to spend, they are also making value more of a priority and cutting back on some entertainment expenses. Pricey restaurants, hair salons, and spas have suffered the most as consumers forgo a massage or a latte at Starbucks (SBUX) in favor of cheaper forms of entertainment, or expensive entertainment of higher value.

E-commerce and online gaming will be important for China's economy during the global slowdown. These sectors are to younger Chinese consumers what nickel theaters were to scores of Americans who went looking for cheap forms of entertainment during the Great Depression. E-commerce is booming for the reasons I predicted in BusinessWeek a few years ago.

We have found that the slowdown will actually trigger more online sales as consumers go to the Web to hunt for deals. We expect business-to-consumer e-commerce to grow by 20% in 2009, driven by younger consumers looking for better prices on computers, cosmetics, and apparel, and to buy items not readily available due to a lack of foreign retailer penetration in second- and third-tier cities. As one consumer in Shanghai told us: "Why buy a ThinkPad computer in a store when I can find more variety and better prices online?"

Online Consumer Activism

In China, e-commerce has evolved into a form of entertainment as buyers talk on blogs and company sites about their likes and dislikes of different products, brands, and marketing campaigns. It has become commonplace for consumers to scour the Internet for information before making any kind of significant purchase, and online consumer activism has taken off as message boards and chat rooms have grown in popularity. Look for Alibaba's C2C auction site Taobao to boom as consumers start buying second- and third-hand mobile phones and other electronics items.

Online games from companies such as Netease (NTES), Shanda (SNDA), and The9 (NCTY) will also see growth as consumers switch away from eating out in expensive restaurants and drinking in nightclubs and instead turn to the Internet to entertain themselves. The sector boomed 76.6% in 2008 and a comparable increase is possible this year as consumers scale back on more expensive forms of entertainment. Consumers say they like online gaming because of the social element and because of the escape it offers from the mundane.

In addition to the relatively inexpensive entertainment available online, consumers are still spending on pricey forms of entertainment that they value. Even as some cut back on trips to spas, our research indicates they still plan to spend a lot on travel in 2009. The majority of women under the age of 35 told us they will spend more on travel this year than in 2008 and are expecting to take one trip domestically in the next year, with 30% planning to travel abroad to places such as Hong Kong and Italy for shopping trips.

One 26-year-old woman from Shanghai told us she had just returned from a vacation with her mother to Malaysia, where she spent more than two weeks' salary for one night in a hotel room to "treat her mother." In other interviews with women from Anhui earning less than $300 a month, we were told they would definitely make the trip to Shanghai with their children if Walt Disney (DIS) opened a theme park there. (Disney has been in negotiations with the government to launch a Shanghai version of Disneyland.) Consumers will still spend on entertainment such as expensive trips and theme park visits to make their families happy.

China is not immune to the financial crisis, of course. Real estate has been hit especially hard, and it will be some time before the sector recovers. But all is not lost, and the Chinese consumer is still spending on leisure and entertainment while looking for better value. The name of the game will be cautious spending in 2009. If Disney does close its Shanghai deal, the company will certainly benefit in the long term.

Comments

[j_remington:]

"women from Anhui earning less than $300 a month"

that does not translate to alot of expendable income for entertainment

Mar 26 09:46 AM

[huangthomas:]

There is a tremendous "inequality" of income in China. When I traveled to the major cities, they are as prosperous as any major cities in the west with pockets of poverty. But, when you go out to the country side, that is where the poverty is. Premier Wen recently uttered during his European tour: China is a great country, but it is still a very poor country. The per capita income of Chinese is $5,000/year, 46.5% of the world average (Xinhua News Agency) of $9,000. I appreciate purchasing power of certain segments of Chinese society, but it should not be extrapolated to the entire country, which is still poor by any standard.

Mar 26 11:18 AM

[sinned-eel:]

Mr. Rhein,

I am interested in the present makeup of your portfolio. I recalled that you only owned 4-5 stocks and you concentrated your investments amongst their 4-5 stocks. Prior to the Olympics you took some stocks off the table. Have you purchased back those stocks or stock in other companies. Thanks.

Mar 26 01:50 PM

[Mad Hedge F...:]

As well they should. The one screaming buy out there now are the emerging markets. The US, Europe, and Japan are now committed to spending trillions of dollars to shock the global economy back to life. This is costing the emerging economies nothing, and gives them a free ride back to prosperity. IT turns out that the smaller economies are financially better off than the big ones, with a decade long export boom blessing them with massive foreign exchange reserves and little debt. China, Russia, India, Brazil, and Turkey will be the big beneficiaries. You can buy the specific ETF’s for these countries, or go with the generic iShares MSCI Emerging Market ETF (EEM), which has already started to outperform US markets in a big way. It’s a once in a century opportunity to buy the highest growth corners of the world’s economy at severely knocked down prices.

Mar 26 03:55 PM

[WebWatcher:]

you have some data summary from your survey you can share with us?

Mar 26 07:49 PM