Why Chinese Consumers Spend So Much When They Earn So Little
Although China may have the second highest GDP of any country, when divided among its 1.4 billion citizens, it ranks down at number 65, just under Mexico and below the global average according to IMF 2019 estimates. Although China's relatively swift return to normalcy following the coronavirus may see it jump a few places this year, it still lags some way behind most developed economies.
China's 2019 GDP per capita of $10,098 pales in comparison to the $65,111 in the US. Similarly, its average 2018 urban wages of around $12,000 are just a fraction of the $63,093 earned a year in the States. So why are so many brands banking on China's structurally low GDP per capita and poorly-paid consumers to lead the global recovery? If we look under the hood, the economic metrics and drivers in China are unlike those in the West, and only paint part of the picture.
For the average consumer in China, the wages one earns influences spending less than it that it does in most other countries, simply because they have more wealth behind them. In fact, China's median urban household net worth stood at $198,330 at the end of 2019, versus an estimated $104,000 in the US.
Many readers are likely to be scratching their heads wondering how they can be wealthier based on the GDP and income fundamentals above. Chinese may be known as strong savers (although the youth have been taking on consumer debt like no tomorrow over the past few years), but how could saving that relatively low income create a level of wealth double that of half of American households?
The main reason is property wealth. When China's housing stock was privatised in the late 1990s, most Chinese families were able to buy their homes and apartments at rates that are a fraction of what they are today. As a result, 96% of urban Chinese own property versus just 64% in the US. Having bought their property for such a low price, their indebtedness is also much lower. 57% of Chinese households 'officially' have debt, versus 77% of American households. And Chinese 'official' debts account for just 16% of their assets, versus 36% in the US.
A whopping 31% of Chinese households own two apartments and 11% have three or more. When the average apartment costs over $1 million in many districts in Shanghai, for example, it means that there are a large number of very wealthy people in China who are fuelling everything from the global luxury market, to cosmetics, to cars, to milk.
Although consumers are still not skipping through the shopping isles filling their carts with glee, the overall return to normalcy continues to track well based on spending trajectories. Chinese remain fundamentally wealthy. Parents continue to support their millennial offspring's consumption habits in many cases and many categories are seeing solid growth. With China's $205 billion post-COVID fiscal spending focused on economy-building new industries such as technology, mass transport and power infrastructure, the wealth of the country as a whole is likely to continue to grow strongly over the long run, and with it, its importance as a consumer market.
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