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Public Finance


China’s Changing Consumer Market and the Policy Implications

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  • Author LEE. Jinkook
  • Date 2016/04/26
  • Series No. KDI FOCUS No. 65, eng.
  • Language English
SUMMARY □ China's rural consumer market has exhibited extraordinary growth. Over the past decade, the consumption growth rate and average propensity to consume of rural residents have surpassed those of their urban counterparts, with the former’s consumption patterns becoming increasingly similar to the latter’s. Such a phenomenon prevails in rural areas that neighbor 2nd and 3rd tier cities whose urbanization is progressing rapidly. Accordingly, Korean companies must diversify their products in line with China’s expanding rural markets while further differentiating product composition to satisfy the heterogeneous demands in urban markets. As for the government, efforts must be placed in strengthening the export cooperative system targeting China between domestic manufacturers, distributors (operating in China) and logistics companies.

- This study aims to analyze the growth of and changes in China’s consumer market to gain a better understanding and to discuss the future direction of governmental and corporate responses

- China’s consumer market started to grow in full swing in the mid-1990s and exhibited continued explosive growth since the mid-2000s.

- China’s consumer market grew to the world’s second largest in 2013 with a market scale of $3.4 trillion.

- Over the past three decades, the nominal consumption expenditure of urban and rural residents has expanded over 20 fold.

- Overall, the consumption growth of rural residents have surpassed that of urban residents since 2004.

- The APC of rural residents exceeded that of urban residents in 2005.

- When limited to cashonly consumption, rural residents’ APC has improved continuously.

- Consumption growth rate by item is found to be higher in rural residents than in urban residents.

- China’s rural areas today are also experiencing servitization in line with the increases in income and consumption.

- Consumer markets in the 2nd and 3rd tiers have spurred the consumption growth in rural areas.

- Urban areas are showing slower growth due to the reduced consumption by residents in 1st tier cities.

- Consumption growth in urban 2nd and 3rd tiers has been steadily maintained at a relatively high 11%.

- Urbanization rate has risen fast mainly in prefecture-level cities in 2nd and 3rd tiers, and there is enough room for additional increase.

- A 1%p rise in the urbanization rate equals an increase of 93 yuan in the annual average per capita consumption and 123.6 billion yuan in China’s total consumption.

- Urbanization which results in the rise in consumption goes beyond urban areas to reach neighboring rural areas.

- The contribution of urbanization to the rise in consumption is confirmed in all estimated results.

- Domestic consumer goods manufactures need to be actively encouraged to enter China’s rural markets with diverse products.

- Product composition targeting urban consumer markets must be differentiated, relying on the collaboration between Korean distributors in China and domestic consumer goods manufacturers.

- The Korean government should strengthen the cooperative export system targeting China between Korean distribution companies operating in China and domestic consumer goods companies as well as the logistics companies that link them.
KDI VOD Report
China’s consumer market is changing.

In 2004, China’s rural areas surpassed their urban counterparts to drive the growth in consumption and the trend has continued since.

Although China is one country, its consumer markets are completely heterogenous. As a result, understanding the target market is essential. In particular, due to the rapid emergence of the consumer markets in rural areas, focus must be placed not only on urban but also rural areas.

Accordingly, this study examines,
1. The changing consumption patterns in China’s urban and rural areas.
2. Which specific area is leading the upward trend.
3. And the sustainability of the trend by estimating the impact of urbanization on consumption.

Firstly, let us examine the changes in the consumption patterns of China’s urban and rural residents.

For urbanites, the share of living necessities such as food and clothing in their overall consumption is declining while that related to health and leisure such as transport/communication, education/culture/entertainment and medical care continues to rise.

In rural areas, similar developments can be witnessed and consumption patterns are rapidly changing to resemble that of urban areas.

Then, which of China’s rural areas is spurring the growth?

For a better understanding, let us examine China’s city tiers.
Based on overall competitiveness, there are several tiers.
The top three are:
The most economically advanced, First tier,
The urbanized and industrialized, Second tier,
And the recently economically developed, Third tier.

The rural areas are also divided correspondingly.

Analysis of the consumption growth rate per capita of each tier reveals that the second and third tiers in rural areas are driving the surge.

Meanwhile, in urban areas, the consumption growth rate in the first tier remains relatively low while that in the second and third tiers maintain stable growth.

As it can be seen, the sharp increase in consumption in the second and third tiers of both rural and urban areas has not only boosted the growth in China’s consumer market but is also leading it.

So, can the growth trend in the second and third tiers continue?

In order to find out, this study quantitatively analyzes the impact of urbanization on consumption.

The results show that China’s overall spending would increase 123.6 billion yuan for every 1%p rise in the urbanization rate.

The current urbanization is rapidly progressing, especially in the second and third tiers, and there is still sufficient potential for future growth. This means that the current growth trend in consumption will also continue.

The time has come to not only visualize but actualize the where, what and how of targeting the Chinese consumer market. Companies must expand their export of steady sellers like home appliances, household items and processed foods in rural areas while diversifying and differentiating products lines in urban areas to meet the needs of both urbanites and migrants.

As for the government, it must make every effort to strengthen the cooperative system between domestic consumer goods companies and Korean distribution companies in China as well as the logistics companies that link them, and enhance the connectivity of policies on said fields and SMEs to enable active participation.
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