Consuming China: How to get ready for the next stage

It’s been the next big thing for years—and now it is actually happening. China is turning the corner toward becoming a consumption-led economy.

Yes, savings rates will stay high and sure, there is still tons of room for investment in infrastructure and industrialization. But by 2015, we estimate that private consumption will catch up to and then exceed public investment (See exhibit 1 in attached PDF). We feel confident about this prediction for two reasons. First, we have the data to back it up. In 2007, the McKinsey Global Institute conducted a large-scale study to understand the evolution of the Chinese economy. The results were intriguing enough that beginning in 2009, McKinsey’s Insights China team has steadily refined this research. In the most recent iteration, we spent literally thousands of hours refining our forecasts at the national, regional, and provincial levels—and for 815 cities. We believe that our model represents the most reliable view of the Chinese economy (while acknowledging, of course, the possibility of short-term volatility and even outright shocks).

Second, we have seen it happen before. The tigers that pioneered Asia’s postwar development (Japan, Hong Kong, Singapore, Taiwan, and South Korea) all followed a similar trajectory, with high investment shifting toward higher consumption as income levels rose. There is no reason why China should buck the pattern, particularly since the government clearly isn’t trying to buck it. As Premier Wen Jiabao put it not long ago “Our problem of unbalanced, unharmonized and unsustainable development is still prominent, especially… the imbalance between investment and consumption.”

Our headline figure is that China will grow an average of 8 percent to 9 percent a year to 2015. But the more interesting question is this: How will it get there?

Here are some factors to keep in mind as companies adjust their business focus:

1. Growth will be faster outside the mega-cities
2. Serve the people
3. Track spending patterns
4. The human-capital equation
5. Innovate for China

Download the full report here. This article originally appeared on the Consumer & Shopper Insights website



 

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