Rise of the affluent in China's smaller cities

Alibaba founder Jack Ma in Beijing, in front of a screen showing real-time data of transactions at the group's global shopping festival on Nov 11. One trend driving growth in Chinese demand is the powerful role of e-commerce. Chinese customers browsi
Chinese customers browsing products at the opening of a new Apple store in Dalian, Liaoning province, in October. Upper-middle-class and affluent households will drive spending and lead China's consumer market into a new era, despite growing concerns over the state of its weakening US$10 trillion economy, said the report by consulting firm BCG and AliResearch.PHOTO: AGENCE FRANCE-PRESSE
Alibaba founder Jack Ma in Beijing, in front of a screen showing real-time data of transactions at the group's global shopping festival on Nov 11. One trend driving growth in Chinese demand is the powerful role of e-commerce. Chinese customers browsi
Alibaba founder Jack Ma in Beijing, in front of a screen showing real-time data of transactions at the group's global shopping festival on Nov 11. One trend driving growth in Chinese demand is the powerful role of e-commerce. PHOTO: REUTERS

Another 46 million upper-middle-class, rich households to be seen in 5 years: Study

Big metropolises like Beijing and Shanghai no longer rule the roost of economic opportunities in China, with smaller cities now racing ahead as their increasingly cashed-up residents drive the future of consumption in the country.

Forty-six million additional upper-middle-class and affluent households will emerge in China over the next five years, of which half that number will likely be located outside its top 100 cities, according to a report by consulting firm BCG and AliResearch, a unit of Chinese e-commerce giant Alibaba. These are typically classified as fourth-tier cities or lower.

"Companies will have to venture far beyond China's biggest metropolitan areas to win the loyalty of upper-middle-class and affluent households," said the report which was released this month. It was titled The New China Playbook: Young, Affluent, E-savvy Consumers Will Fuel Growth.

  • Chinese consumption - in numbers

  • US$6.5 TRILLION

    The size of China's consumer economy by 2020, even if its annual economic growth slows to 5.5 per cent over the next five years. It will be second to the United States' consumer market, which is forecast to expand to US$15 trillion (S$21 trillion).

  • 1.3 TIMES

    The US$2.3 trillion increase in China's consumption by 2020 alone will be comparable to adding a consumer market 1.3 times that of Germany or Britain. The spike will come from the rise of upper-middle-class and affluent households, younger consumers and e-commerce.

  • 30 PER CENT

    The share of upper-middle-class and affluent households - those with more than US$24,000 in annual disposable income - in China by 2020. These households now make up 17 per cent of all urban households, up from 7 per cent in 2010.

  • 17 PER CENT

    Yearly consumption growth among upper-middle-class and affluent households, compared to 5 per cent among lower-earning households.

  • 53 PER CENT

    The share of total consumption by China's youth - those born in the 1980s and later. Consumption by the younger generation is growing at 14 per cent annually, twice that of consumers older than age 35.

  • 24 PER CENT

    The e-commerce market's share of total private consumption by 2020. Online transactions now account for 15 per cent of domestic consumption, up from 3 per cent in 2010.

 

"There are high concentrations of such households in more than 2,000 cities and we estimate that to reach 80 per cent of this market by 2020, companies will need to establish their presence in 430 cities," it added.

Upper-middle-class households are defined in the playbook as those with a disposable income of between US$24,001 and US$46,000 (S$33,700 and S$64,000) while affluent households enjoy an income of more than US$46,600.

The "dramatic" rise of these two classes, in particular, will drive spending and lead China's consumer market into a new era, despite growing concerns over the state of its weakening US$10 trillion economy, the report said.

By 2020, for instance, the number of these households is expected to double to 100 million and account for 30 per cent of all urban households, compared with 17 per cent currently. They are also expected to make up 55 per cent of Chinese urban consumption and 81 per cent of its incremental growth.

"Although the pace is slower and the course is bumpier, consumption growth is still tracing a staggering trajectory. China's consumer economy is projected to expand by about half, to US$6.5 trillion, by 2020 - even if annual gross domestic product (GDP) growth cools to 5.5 per cent," the report noted.

"The incremental growth of US$2.3 trillion over the next five years would be comparable to adding a consumer market 1.3 times larger than that of today's Germany or Britain," it said.

Spending patterns in the world's No. 2 economy are also changing as the ranks of the wealthy grow. Services rather than physical goods, for instance, are becoming China's main consumption growth engine, a trend attributed to the rapid rise of the upper middle class.

"As consumers enter this income segment, the consumption of luxury goods, automobiles, wine and overseas travel increases sharply," the report said. It added that the wealthy also spend 3.3 times more on education, culture and entertainment than emerging-middle and middle-class households.

Businessman Wang Chengjia, 39, from the small north-eastern city of Hulunbeier in Inner Mongolia, is no stranger to this trend. Now part of the "affluent class", he has observed the expenditure patterns of his family change as the car trading business he set up in 2003 gradually took off.

"Compared with a few years ago, of course we are spending more now. While we could only think about buying branded goods back then, we can actually afford to buy European brands like Louis Vuitton now," he said. "Other areas we are also spending more on are health products and overseas travel."

But two other mega trends are also driving growth in Chinese demand, the report noted. They are the increasingly powerful role of e-commerce and a new generation of sophisticated consumers who are not only bigger spenders but also more brand-conscious.

"The growing role of richer, younger, Internet-savvy consumers will boost demand for different kinds of products purchased through different kinds of retail channels. This emerging consumer class will transform the structure of China's economy," it added.

A version of this article appeared in the print edition of The Straits Times on December 29, 2015, with the headline 'Rise of the affluent in China's smaller cities'. Print Edition | Subscribe