Luxury Spending: China's Affluent Entering "Enjoy Now" Phase of Consumption
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China is now the world's third largest buyer of luxury consumer goods, accounting for 12 percent of global demand, according to a Goldman Sachs report released December 11. The report projects that Chinese purchases of high-end items—including designer handbags, perfumes, and watches—will grow by 25 percent annually over the next four years, and that by 2015 China will be the world's largest luxury brand consumer, with a 29 percent global share.
Like many developing countries, China has witnessed a rapid growth in consumption in recent years, as more people embrace the lifestyles and buying habits common to the world's wealthier nations. The country's "consumer class" totaled some 240 million people in 2002, representing 19 percent of the population, reports State of the World 2004. Top-brand consumers account for about 13 percent of the population, or 169 million people, according to Yang Qingshan, secretary-general of the China Brand Strategy Association.
For China's nouveau riche, consumption is shifting from a struggle to meet basic needs to an "Enjoy Now" phase where higher-end purchases are no longer out of reach. Young urban professionals increasingly lay down big bucks for such items as Louis Vuitton bags, Christian Dior perfume, and Cartier watches. According to Goldman Sachs, China's purchases of luxury goods exceeded US $6 billion in 2004.
Driving this trend are a rapid rise in disposable incomes, an acceptance of new lifestyles, and a growing ability to buy on credit. The Asian Development Bank reports that in 2004, urban incomes in China increased 7.7 percent, versus 6.8 percent in rural areas. The annual income for affluent families averaged 51,000 yuan ($6,145) in 2004, compared with a national average of 11,600 yuan ($1,397) and an urban average of 23,900 yuan ($2,879), according to a recent Gallup poll. Among other things, rising incomes are contributing to heightened awareness of the benefits of a university education, new interest in traveling abroad, a desire to invest in stocks and real estate, and growing demand for insurance.
At the same time, the gap between rich and poor in China continues to widen. A survey by the China Academy of Social Sciences showed that in 2004, the wealthiest 10 percent of the population earned a per capita income of 13,332 yuan, 2.8 times higher than the national average, while the poorest 10 percent earned only 1,397 yuan, less than one-third the national average. Statistics from the United Nations Development Programme reveal a similar divide: the richest 20 percent of the population accounts for 50 percent of total consumption spending, while the poorest 20 percent accounts for only 4.7 percent.
China's affluent population, representing 27 percent of all urban households, is mostly concentrated along the southern Pearl River Delta, in eastern seaports, and in the Yangtze River Delta. In sharp contrast with this urban prosperity, 76 percent of China's rural households that lack adequate food or shelter live in mountainous areas, and 46 percent survive on plots of land no larger than one mu (0.16 acres) per capita. The large income disparity between farmers and urban dwellers has contributed to thousands of riots and public disturbances in China this year alone.
China is, of course, following a well-blazed trail. But its rapid embrace of luxury goods has economic implications back home. Of the country's 12 percent share in the world luxury goods market, only 2 percent comes from domestic purchases, while 10 percent comes from spending by Chinese tourists abroad. Thus, despite its strong momentum, the trend contributes only minimally to China's domestic economy. In fact, domestic household spending contributed an average of 46.5 percent to China's GDP over the past five years, well below the 60 percent average in other countries with a per capita GDP of around $1,000.
Overall, private spending on consumer items in China has grown at an annual rate of 12 percent over the past five years. Yet China remains on the whole a country of low consumption. Per capita consumer spending totaled 4,150 yuan ($500) in 2004, and the nation's consumption-to-GDP ratio was only 50 percent between 1996 and 2004, lower than the world average of 80 percent. As the Chinese government includes expanding consumption as a key goal in its eleventh five-year economic plan, it is also taking actions to narrow the country's rich-poor divide, including amending income tax laws to close loopholes that enable companies to evade payment.
Given that China's consumer class currently represents only about 19 percent of the national population—compared with 95 percent in Japan and 89 percent in Europe—it has significant potential to expand its ranks over the coming decades. Although the average Chinese still consumes far less than the average North American or European, as the global demand for goods and services skyrockets, this could have serious implications for the planet's natural resource base, notes Worldwatch Senior Editor Lisa Mastny.