The Emerging Consumer Market in China

ABSTRACT - This paper first discussed China's economic strength and purchasing power by comparing two measures of GDP per capita and looking into several accounts and factual data about China's position in Asia and in the global economy. Then it examined the third consumer boom and its impact on China's market by looking at consumer behaviors and their trends of change in China.

Citation:

Lianlian Lin (1994) ,"The Emerging Consumer Market in China", in AP - Asia Pacific Advances in Consumer Research Volume 1, eds. Joseph A. Cote and Siew Meng Leong, Provo, UT : Association for Consumer Research, Pages: 300-305.

Asia Pacific Advances in Consumer Research Volume 1, 1994      Pages 300-305

THE EMERGING CONSUMER MARKET IN CHINA

Lianlian Lin, California State Polytechnic University at Pomona

ABSTRACT -

This paper first discussed China's economic strength and purchasing power by comparing two measures of GDP per capita and looking into several accounts and factual data about China's position in Asia and in the global economy. Then it examined the third consumer boom and its impact on China's market by looking at consumer behaviors and their trends of change in China.

There has been little systematic research on consumer behavior and consumption patterns in China's emerging consumer market. This paper, as a preliminary descriptive research in this direction, will deal with the third consumer boom and its implications for the consumer market and other economic sectors in China. In order to understand the potential of China's consumer market, it is necessary to understand China's economic strength. Some Western economists ranked China's economic size number two in the world [Zuckerman 1993], only after the US, while others refer to China as a sea of poverty [Maisano 1991]. China's economic size and its potential will have a direct impact on its consumer market and purchasing power. Thus this study will first discuss China's position of economic strength and then present the third consumption upsurge and the emerging consumer market in China.

THE DRAGON HAS ALREADY AWAKENED

With the Cold War moving into the trade war, the economic competition replacing East-West confrontation, economics will move much closer to the top of the global agenda [Bergsten, 1990]. The world economy will complete its evolution from the America-dominated regime of the first postwar generation to tripolarity: an economically united Europe led by united Germany, the United States, and the Pacific region. In the structure of tripolarity, China, with 1.2 billion population and the highest economic growth, can not be excluded. It is suggested that world economic power is shifting to the Far East and that the next century will be the "Asian era." It would be overstated if the phrase of "Asian era" connotes world economic dominance by Asian nations [Lin and Allison 1994]. The more likely scenario is that East Asian nations will perform as equal partners in the integrated world economic and political system [Vita 1991]. According to a Fortune article, by the year 2000 the economies of East Asia will almost certainly equal that of the US and total about four-fifths of the European Community [Kraar 1992]. However, Asia will not play a full role in the world economy until China approaches the status of a newly industrialized country [Maisano 1991].

Recently, the new concept of "Greater China", also known as Chinese Economic Area (CEA) or Chinese Economic Delta, has appeared in literature and news media. Greater China includes China, Hong Kong, and Taiwan. The World Bank and the International Monetary Fund (IMF) used the term of CEA in their formal documents. The World Bank predicted that the CEA will become the fourth growth pole in ten years from now, coexisting with current three growth poles: the United States, Germany and Japan. Mr. Weinberger, the former Secretary of Defense of the US and the current Chairman of USA-ROC Economic Council, pointed out that the "Greater China," the Greater Productivity Triangle, represents the most vigorous opportunity of commercial development in the globe. It has become the third largest trade partner of the US, after Canada and Japan [Liu 1993]. According to the Economic Outlook Annual Report of the Asia Development Bank, published in October, 1993, the GNP of Chinese Economic Area will be very close to that of the US by the year 2002. Mr. Garden, the Deputy Secretary of Commerce of the US, in his policy speech in New York on January 20, 1994, ranked the Chinese Economic Area as number one emerging market out of ten "big emerging markets" in the world. He said that China's economic growth is so fast that it could possibly become the second or even first largest economy by 21th century [Fu 1993].

Behind the Fourth Growth Pole theory are the following arguments. First, the total import value of the CEA has reached two third of Japan's and the CEA will exceed Japan by 2002. Second, the CEA's GNP will go far ahead of France, UK, and Italy by 2002. Third, based on the current price, the output of goods and service of the CEA will exceeds Japan and Germany by 2002. Fourth, the CEA has huge amount of foreign reserves. Fifth, the average growth rate of the CEA since 1962 has been 7%. It is expected to be better in the next decade. Sixth, the CEA is at its preliminary stage of development and thus has more potential for further development than developed countries.

The above accounts explain China's position in Asia and in the global economy. I would like to use some factual data regarding China's GDP per capita to illustrate China's economic strength. Basically, two methods are used to measure output in each country: the exchange-rate-based measure and the purchasing-power-parity-based measure. Under the traditional exchange rate method, each country's total output of goods and services is simply added up in local currency and then the local currency value is translated into US$ at international exchange rates of that time. Under the PPP method, each country's output is calculated based on the purchasing power parity, which compares currencies according to what they buy at home. The two approaches can lead to quite different results. For example, China's per capita income in 1991 was $370 under the old exchange rate measure while it was $1450 under the new PPP measure [Greenhouse 1993]. It is amazing to see that PPP-based per capita GDP is four times as large as exchange-rate-based one. The Rand Company in its report offered an explanation for the disparity between the two measures. Many of the goods and service consumed by a country are hardly exchanged internationally and thus not obviously affected by exchange rate [Sun 1993]. Thus a country's PPP-based GDP tends to be larger than exchange-rate-based GDP.

Both measures have their own merits and limits. Under the exchange-rate method, if a country's currency weakens, the size of that country's economy is automatically reduced. This may lead to serious distortions if a country doesn't have free floating exchange system, which is the case in most developing countries, or if a country's currency fluctuates sharply. For example, the Chinese currency declined steeply against the dollar in the 1980's, China's per capita GDP shrank [Zuckerman 1993], although China's average growth was 9% per year in real term. As a result, China's economy had shrunk to slightly less than 2% of global output, from slightly more than 2% two decades ago, even though its economy had grown twice as fast as the world economy [Greenhouse 1993]. In order to correct this invalid results produced by the traditional measures, economists turn to the PPP-based method which measures each economy based on what people consume. Under the new measure, a representative basket of goods and services, including food, clothing, housing and transportation, are selected as a yardstick to compare the total value of output in different countries at a uniform price in US dollar. For example, one cotton shirt bought in China should have the same dollar value as one bought in the US. The outputs in many developing countries without free floating rate systems are usually underevaluated under the exchange-rate method. Therefore, many economists believe that the new method "results in a fairer measure of a country's relative material wealth" [Zuckerman 1993] and "a much more accurate picture of the developing world's economy" [Greenhouse 1993].

TABLE 1

CHINA'S PER CAPITA GDP BASED ON PPP (AT 1990 PRICES) [ZUCKERMAN 1993]

TABLE 2

[KRAAR 1992]

It is interesting to see that economists apply the PPP-based approach somewhat differently and thus came up with different estimates of China's per capita GDP (Table 1).

The UN estimate was arrived at by Professors Summers and Heston, economists at the University of Pennsylvania. They are among the top authorities on interpreting data from the UN International Comparison Program which is to collect PPP data of more than 60 countries without China. Their result is a seven-fold increase in China's GDP while the World Bank's estimate is more than five times its exchange-rate-based measure. Both estimates make China the second-largest economy in the world and were considered by the IMF experts too high. Thus IMF finally settled on an estimate of $1300, which is four-fold higher than its previous exchange-rate-based measure and makes China the world's third largest economy. Although relying mostly on the PPP method, IMF officials states that they would not abandon use of the exchange-rate-based measures [Zuckerman 1993].

I will further compare China's GDP in 1991 with those of several other Asia countries so that we can see China's relative position in Asia [Kraar 1992]. (see Table 2).

Although there are discrepancies among the estimates from different sources, one thing is for sure that China's GDP per capita is much higher than what is publicized by the Chinese government and what people usually think. The following observations may serve as a footnote shedding light on China's real economic size and strength. China's economy has been growing at an average annual rate of 9% in real terms for more than a decade. This economic growth rate contrasts sharply with the US's rate of 2.5% a year. If this growth difference persists, China's real GNP will match that of the US by 2010 [Economist 1992]. The US faces a challenge from a confident, booming giant-China. A report in Time magazine warns the US to "watch out for China" [Nelan 1993]. From the above facts and analysis, we can say that China, the oriental dragon, has already awakened.

In response to the doubts of some people about the purchasing power in China, I will further approach this issue from various angles. Firstly, let's look at the results of a survey on 90,000 sole proprietors in China. The findings of this year-long survey, conducted by the General Bureau of Industrial and Commercial Administration of China, reveals that there were about 490 millionaires in China by mid-1991. By 1993, there were about one million millionaires merely in Guangdong province [Chinese Daily News 1993]. The economy of Guangdong province is taking off and is referred to as the prospective fifth little dragon in Asia, after Hong Kong, Taiwan, Singapore and South Korea. Furthermore, billionaires also appear. In Hainan province only, there are about thirty billionaires. For example, the youngest billionaire Duxin Xian owns private assets of 500 million yuan ($58 million). Secondly, let's see some statistics about the income level of China's households. By 1992, the households with annual income of over 30,000 yuan ($3,448) amounted to 4.3 million families, equivalent to the population of a medium-size country in Europe. China's official statistics indicate that the banking deposits of the richest, which accounts for 3% of China's 1.2 billion population, have reached $33.7 billion. Thirdly, let's see the standard of living in some cities [Xinhua News Agency 1993A]. The study conducted by the Institute of Sociology of the Chinese Academy of Social Sciences indicates that the standard of living in 24 cities out of the 188 large and media-sized cities in China have basically reached "well-off" (xiao kang) level, a level China dreams to reach by the year 2000. This study grouped thirty-two indicators into six categories including level of urbanization and urban development, quality of population, economic efficiency and effectiveness, quality of life, social order, and stable economic strength. Most of these cities are coastal or capital cities such as Beijing, Shenzhen, Shanghai, Zhuhai, Guangzhou, Hangzhou, Dalian, Nanjing, Tianjin, Qingdao, and Shenyang.

TABLE 3

CHINESE OWNERSHIP OF SELECTED CONSUMER PRODUCTS IN 1990

The statistics tell part of the story. If we take into consideration other factors such as almost-free medical care and treatment and housing, the purchasing power in China is certainly much higher than that shown by the statistics. According to a recent study, although the percentage of housing expense keeps rising, the housing expense accounts for only 2.26% in the consumption structure of urban citizens while 11.18% in consumption of peasants [Central News Agency 1994]

It is worth noting that China objects to the new PPP-based estimates of its output. So are other developing countries. The Foreign Ministry of China issued a statement in May 1993 complaining that the new estimate overstates China's economic size. It stated that it is going to take several decades of effort for China to reach the economic level of developed countries. As Greenhouse [1993] observed that per capita income is so crucial in determining assistance to developing countries that the new measure could have far-reaching repercussions in international aid programs. China insisted that the new measure of its GDP doesn't diminish its need for soft loans and other international assistance. In March 1994, China's Ministry of Finance first used the World Bank's co-financing plan and raised $120 million long-term, low-interest loan for China's construction of power plants in Yangzhou city of Jiangshu province. This sovereign loan was guaranteed by the World Bank and financed by American, German and Japanese commercial banks [Chinese Daily News, 1994]. Obviously, China doesn't want to lose its eligibility for low-interest loan provided or co-financed by international organizations.

THE CONSUMER MARKET ALREADY EXISTS

China is a new land of opportunities. China is stretching to become both a new export power and a market of 1.17 billion potential consumers. However, not all countries really understand China and its market potential. It has been noted, for example, that China is referred to as a sea of poverty. Japan, Taiwan and South Korea are described as "tiny prosperous islands growing on the edge of a sea of poverty" [Maisano 1991]. Actually, after its rapid development for fifteen years, China is no longer as poor as it once was or as it appears. The facts and data below indicate that an emerging consumer market in China is unfolding before the world.

There have been three consumption booms in China since its "open door" policy started in 1979. The first one occurred during 1979-1984 when the rural economy started developing rapidly. The first boom was featured with such items as sewing machine, bicycles, electric fans, radios and tape recorders. The second consumer boom occurred during 1984-1991 when the special economic zones and coastal cities have reaped rich fruits. The Chinese were looking for household durables such as TV and VCRs, refrigerators, washing machines and motorcycles. The following statistics shows the details of the booms (Table 3).

The recent statistics from China Statistics Bureau shows that by June 1993, per 100 households have owned 77.8 color TVs, 85.4 washing machines, and 55.3 refrigerators [Chinese Daily News 1994].

The current third consumer boom started in 1992 and is featured with advanced durables such as video cameras, air conditioners, telephones and pagers, kitchen and bathroom equipment, and automobiles [Chinese Daily News 1993]. Although telephone service is so common in Western countries that it seems just part of daily life, it is more expensive for a Chinese family to have a telephone than a color television. This is not because that a telephone set itself is too costly to be affordable, but because that the installation and maintenance of a telephone cost dearly. For example, it costs about 5,000 yuan to install a telephone, which is equivalent to more than one year's salary. Thus the Chinese people consider telephone as an advanced durable. It is not surprising that many Chinese may own several durable goods without a telephone. This situation is changing now. Now 20.3% of households in Guangzhou has telephone while it was 13.9% in 1992. China has become the third largest wireless network in the world, only after the US and Japan [China News Center 1993]. There were 2.5 million wireless radios by the end of the 1993, and 460,000 users of action phone and over 6 million users of pager by the end of August of 1993. Seven years ago, the majority of Chinese people didn't know what a pager was. Now a pager has become their new favorite. The number of pager users in China has ranked number four in the world [Hong Kong Chinese News Agency 1993]. Let's just look at the example of Beijing, the capital of China, the number of pager users has reached 300,000. One out of forty people has owned a pager.

It is predicted that the third consumer boom will reach its peak with automobiles in great demand. In 1993, one sixth of 6 million auto vehicles in China was owned by private individuals. The corresponding number was one tenth in 1985 and zero in 1978. According to a survey conducted by the Beijing Statistics Bureau [China News Agency 1993], in Beijing city, 59% of the households with annual income more than 20,000 yuan ($2,300) intend to purchase automobiles around the year 2000, although 94.4% of the prospective buyers are worried about high maintenance expense. 49.7% of the people surveyed plan to buy automobiles as daily transportation vehicles, 40.2% want to use autos as business transportation tools, only 10.1% want to use cars for taxi business. Now 5,800,000 automobiles are running in Beijing city, 100,000 of which joined the heavy traffic flow in 1993 [Beijing News 1994]. In the same year, China imported 310,000 and manufactured 590,000 auto vehicles of various kinds, one fifth of which was privately owned. During the first two month of 1994, about 15,000 automobiles were sold in one single largest auto market in Beijing. Half of the car buyers are private individuals. Most private car buyers prefer a car at price of 100,000 to 210,000 yuan ($11,500-24,200). A China-Germany joint venture automobile manufacturer has successfully entered China's market. It sold 18,000 automobiles within two years and its production-sales rate reached over 95%. Mr. Jin Wan, the president of the joint venture, said optimistically that this company will produce more than 150, 000 automobiles annually by 1996 [Xinhua News Agency 1993B]. However, imported luxury cars also have an increasing market since it represents one's wealth and social status. For instance, fifty British Rols-Royce automobiles have been sold in past one and half year in China, although each cost $431,038 (the original price $172,415 plus 150% tariff on imported cars). During the first six months of 1993, 3,100 Mercedes-Benz automobiles were sold to not only Chinese officials, but also Chinese business people and sole proprietors.

THE IMPLICATIONS AND TRENDS

The third consumer boom will have far-reaching repercussions in the consumer goods markets, the industrial material market, and the service market like travel, entertainment and recreation in China. According to China's marketing experts, the following consumer goods markets will grow rapidly.

1. Food and Drink Market

Chinese people are no long satisfied with simply eating their fill. They want to improve the quality of their diets. Their food structure is changing from mainly grain to a combination of meats, fruits, vegetables and grain. Nutritious, healthy, and tonic food with low sugar, low cholesterol, high protein and vitamin are in great need. People are seeking more time for leisure and don't want to spend a lot of time cooking. As a result, fast food like frozen food, hamburgers, and ready-to-eat meal box is getting more popular. McDonald's and Kentucky Fried Chicken are in the lead.

According to a report published in Europe-China Economy and Trade magazine which recently started, the mainland China has become the largest market for French brandy. In 1993, 16 million bottles of O.C. and VSOP French brandy were sold in China. The four well-known French brandy producers see the mainland market represents the future of French high-grade brandy and have developed strategies to expand its market share in China. Presently, beer consumption has exceeded liquor in Chinese daily life. Beer production has become one of the pillars of China's food and beverage industry. China has ranked the world's second largest beer producer with the output of 12 million tons, only after the US.

Other soft drink like Cola also has increasing demand. Foreign companies are actively expanding this market. At the end of 1993, Coca-Cola announced its new investment of $500 million by 1996 in China. One month later, Pepsi, which has cumulatively invested $100 million in China since 1982, signed a formal memo with China to add new capital of $350 million within five years so that its sales can double by then. Now Pepsi occupies 7% of soft drink market in China. Like beverage, cigarette is also very important daily consumption. there are more than 300 million smokers in China. They consume 30% of the world cigarette sales. Foreign tobacco companies are trying to seize the opportunity and expand their business in China.

2. Fashion Market

A wide variety of clothing such as working dress, casual attire, travel apparel, special costume, and high-grade modern fashion are all in much demand. Chinese urbanites are yearning to dress like their overseas relatives and trying to keep pace with the rapid change of fashionable clothing. People look first at the brand, design, pattern, color, and material when they buy clothing. Price is their second consideration. You have to fight your way through crowds to buy a new style and well-know brand shirt that can cost two to three hundred yuan, equivalent to one month salary of an average Chinese worker.

3. Household Decorative Material Market

Influenced by Western life style, Chinese people are changing their consumption mentality. Nutritious food and fancy clothing are not enough. They want to live in more exquisitely decorated houses with modern furniture, gas stove, and show equipment. Household decorative material and related items such as carpets, man-made leather for floor, color tiles, wall decorative paper, and decorative lights like wall lamp have become common consumer goods.

4. Cosmetics and Jewelry market

According to the statistics of Beijing city, about 20% of monthly salary of Beijing women is spent on cosmetics. One jar of facial cream costs 98 yuan, about one third of one worker's monthly salary. Despite its high price, the cosmetics are still very popular. Avon Cosmetics Company of the US opened its first branch in Guangzhou city in which there are four million women. The individual incomes in Guangzhou ranks number one in China. Since starting operations here in September 1990, Avon has had trouble keeping up with the booming demand. According to Barry Wong [Blustein 1994], the general manager of Avon's operation in Guangzhou, Avon sold all its inventory in the first two weeks and in 1992, it sold $4 million worth. Wong reckons that sales more than doubled in 1993 and are set to shoot up again in 1994. Avon has built a sales force of 21,000 in the city. These saleswomen can earn commissions from selling Avon products two or three times the incomes available in other jobs. Moreover, the company hasn't even tried to sell outside of Guangzhou yet. Thus the company is optimistic about its future business in China, believing that the full potential of its China business has only begun to become apparent.

5. Durable Goods Market

The Chinese people are now looking for video cameras, air conditioners, telephones, and high-grade CD players. The demand for automobile as well as motorcycles will continue to increase. China has become the largest motorcycle manufacturers with the annual output of 3.35 million, half of which was produced by the biggest three Chinese-Japanese joint ventures. In addition, mini electrical appliances like microwaves, electric ovens, and hot-water-heaters are also increasingly used.

Personal computers have entered the Chinese households very quickly. More than 500,000 personal computers had installed in China by February 1993. This trend will continue into the year 2000. Thus it is said that China's personal computer market probably will become the largest market in the world in the next decade.

6. Gifts and Souvenirs Market

Household formation will keep growing at a high rate in China and wedding is considered something that usually occurs only once in one's entire life. It is a Chinese tradition that a new couple will buy a wide variety of suppliers for their new families and new lives. Wedding and marriage suppliers cost about 10,000 yuan for each new couple, equivalent to three year's salary. Another important occasion for Chinese people is funeral, which usually costs several thousands yuan. People have to exchange gifts in many other occasions such as birthday, promotion, moving into new house, graduation, and changing jobs and so on. In the past, the tradition behind the exchange of gifts is that the gift is nothing much, but it's the thought that counts. Nowadays, the notion goes to the opposite: the gift is very costly but the feeling is trifling. The gift market is very brisk.

7. Children Suppliers Market

Given the only-one-child-per-family policy in China, parents treat their only precious child as an emperor in the family. Kids food, children clothing, and toys, especially electric toys, sound-control and remote control toys are high on most families' shopping lists. Parents are so keen to have their children to be the top student and stand out among their fellows that the educational products and toys often outsell those that are purely recreational.

8. Senior People Suppliers Market

As old-aged population is increasing rapidly in China, special food for senior people and health care suppliers are also very much needed.

The third consumption boom will also produce a profound impact on the service market and the industrial material markets in China, which can be illustrated by the following examples. First, people with more income are changing their consumption style and structure. They spend more money on entertainment, recreation and travel. In 1993, per capita expense on recreation like dancing party and KARA OK increased 45% than previous year in Shanghai city, the largest city in China. Guangzhou takes the lead in the trend. The youth are keen on romantic parties, eating in restaurants, and flower fair. It was reported that the most expensive and most romantic party with attendees of over 500 couples and 5,000 roses around was held in Guangzhou on Valentine's Day this year and the whole party cost more than 600 thousands yuan (about $70000) [Xinhua News Agency 1994]. Second, China's demand for civil aircraft is rapidly rising due to increasing traveling. According to the forecast by Boeing Aircraft Company and McDonnell Douglas Company, Asia and Pacific region, especially China, will be the largest market of commercial airplanes within twenty years. McDonnell Douglas has concluded a contract with China Aviation Industry Company to co-produce 40 large-sized airplanes. Boeing received an order of 21 civil aircraft from China. An European company is scheduled to deliver 12 A-300 airplanes to China. Third, the great demand for automobiles leads to a huge demand for plastics for auto use. Currently, China's annual output of motor vehicles is 900,000 while it will be two million by the year 2000. The National Information Center's analysis indicates that 64,000 tons plastics for automobile manufacturing will be needed and it is beyond China's capacity. It is another opportunity and potential market for foreign businesses.

CONCLUSION

Now we have already seen a picture of an emerging consumer market in China. There are 370 million households in China. If each family buys just one durable item, you can imagine how large the market can be. With the third consumer boom, Law for Protection of Consumer Rights and Interests was promulgated in December 1993, which will further promote growth and prosperity of the emerging consumer market in China. The third consumer boom will spur other economic sectors and drive China's economy well into the twenty-first century. The Japanese seized the opportunity and expanded into China market very fast. According to statistics from the China's Customs, Japan has replaced Hong Kong and become the largest trade partner of China with total trade amount of $39.04 billion. Hong Kong ranked number two with total of $32.54 billion while the US ranked number three with the total of $27.65 billion. Now American companies have realized the huge potential of China market and is trying hard to catch up.

The awakened China and its rising purchasing power and fast-growing market will definitely have a significant impact on the global economy. Mr. Keidel [1984], an American economist, vividly illustrates China's potential impact on the world. "Has China's macroeconomic dragon awakened? If it flicks its tail, will textile plants around the world close? If it breathes its fire, will Korea, Taiwan, and Japan be scorched out of the TV, toy, and machine tool trades? If it gulps a meal, will North American granaries empty? Who can say?" He concluded that dragons in general have been rather poorly researched. The same can be said for China's macroeconomy. Finally, let me quote an American commentator's question and answer as concluding remarks for my study. "How should China be treated: with fear or favor"? "The best answer is: with delight". "In the long term China's prospects are excellent, which could prove the best economic news the world has had for at least a century, and the best news China's people have ever had" [Economist 1993]. My study is an effort to increase mutual understanding between China and the rest of the world.

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