Most Chinese consumers tend to spend more

Despite slowing economic growth and market volatility, China’s consumers continue to spend, albeit a bit slower at the moment, and consumption growth remains on a staggering trajectory, according to new research by The Boston Consulting Group (BCG).The survey found that three-quarters of Chinese consumers plan to maintain or increase the level of their spending in 2016 down only slightly from 81% in 2015.The two principal drivers of growth in consumption are consumers’ ability and their willingness to spend more. The ability to spend remains strong: more than 40% of Chinese urban households today are firmly in the middle class and affluent (MAC) category.The willingness to spend is strong as well, but it’s down from its peak in 2007 as slowing household-income growth takes a modest toll. Household income growth declined to 8.7% in the first quarter of 2016 from 9.4% a year earlier, a result of the slowdown in the industrial sectors of the economy, which is leading to a more cautious stance among many consumers employed in these sectors.“Even as sentiment moderates a bit, it is important to note that we are looking at a slowdown in consumption growth,” said Jeff Walters, a BCG partner who oversaw the research. “Consumption in 2016 will be tantamount to consumers’ moving from the fast lane to the middle lane on the economic highway. They are not pulling into the breakdown lane.”The forces behind rising consumptionTwo of the forces behind continuing strong consumption in China are the rise of upper-middle-class (UMC) households and small-city MACs, and the emergence of a new generation of younger, freer-spending, sophisticated consumers.Almost 30%—the same as in 2015—are planning to spend more this year. A big reason for the spending resilience among UMC and affluent consumers is that half of UMC consumers and three-quarters of affluent consumers are employed in the high-end service sector. Consumers in the emerging middle class, middle class, and aspirant categories, whose spending has been growing at 5%, indicated that some belt tightening was in order.Only about a quarter of these consumers intend to spend more in 2016.China’s “young generation” is growing quickly in both numbers and income. Those aged 18 to 30 years old will likely make up more than one-third of the urban population by 2020. Their consumption is growing at a 14% annual rate—twice the pace of the “last generation,” those older than 35. The young generation’s share of total consumption is projected to increase from 45% to 53% by 2020.Home values trump stock market turmoilRecent stock market volatility has little impact on Chinese consumers’ daily lives, including consumption. More than half of China’s consumers see the market volatility as normal; more than 40% consider the recent volatility a correction to the stock market bubble that formed after a sustained period of strong growth.Housing-market stability is a much more critical consideration for Chinese consumers, who continue to be optimistic about housing prices. More than 80% of urban households own their homes, and 60% of these homeowners are sitting on unrealized gains in value.Consumers continue to trade upChinese consumers like to trade up, but the mix of objects of their desire is undergoing some transition. Infant and baby products, consumer electronics, and financial services remain the three categories in which consumers are most likely to trade up. Personal-care products—such as for skin care and beauty—and travel and vacations are moving up the list. Cars and durable goods are moving down, perhaps indicating that consumers are manifesting some uncertainty in the current environment by postponing trading up in big-ticket categories.