Doing Business with China

Chinese consumers have had increasingly more disposable income to satisfy their basic needs of life as well as their aspirations for modern life styles. At the same time, the opening up and reforms have also benefited the Chinese consumers with the material abundance that could not have been possible before. Consumer preferences, life styles and consumption patterns change over time, with the evolvement of the consumer market.

Declining Engel's coefficient in urban areas

With the increase in disposable income, spending on food as a percentage of the total consumption expenditure has been declining, which indicates that the standard of living in China has been improving. As shown in the following figure, the Engel's coefficient was relatively high before 1980 at above 55 per cent. From 1982 to 1993, the coefficient was within the range of 50 “55 per cent although there were fluctuations. Starting in 1994, the Engel's coefficient has been below 50 per cent. By 2001 the Engel's coefficient had declined to 37.94 per cent compared to 39.18 per cent in 2000.

Continuously escalating consumer aspirations

With the declining Engel's coefficient, the Chinese people have more money to spend on non-staple items. The opening of the country to the outside world has also provided the Chinese people with an opportunity to realize their aspirations for what is called 'household modernization'. The changes are reflected in the durable items that the Chinese people hope to own. In the 1970s it was a symbol of wealth for people to own a bicycle, a watch and a sewing machine. They were regarded as fashionable for the then newly-married couples. In the 1980s the desired durable items became electrical household appliances, namely, television sets, washing machines, refrigerators and VCRs. Consumer aspirations continued to escalate in the 1990s, when people shifted to video cameras , audio systems, telephones, motorcycles and modern furniture. The Chinese people are now hoping to realize their dream of owning a personal computer, a private car, an apartment and a modern home decor.

Figure 1.7.6: Engel's coefficient for urban residents is declining

An average urban household now owns more than one bicycle and one television set. A majority of urban households have electrical household appliances such as washing machines, refrigerators and colour television sets. More and more households are acquiring air- conditioners, personal computers, cars and mobile phones (see Table 1.7.11). By the first quarter of 2002, the number of telephones subscribed has reached 350 million, among which 161.5 million are mobile phones.

Changing life style

The life styles of the Chinese have also changed greatly since the economic reform and opening up. The green or blue uniforms have been replaced by modern fashion products and western suits. Western suits are accepted as formal clothing on formal occasions. Hosting friends at restaurants is no longer a luxury. The tradition of family gatherings at home is increasingly replaced by more chances to dine out together. Processed or semi- processed foods are becoming part of the Chinese people's life as a result of increased income and preferences for more leisure time. Unbranded generic products are losing their footholds in the market as people are building their brand awareness in pursuit of better products.

Modern marketing has also contributed to the change in consumption habits. Supermarkets, chain convenience stores and membership club stores are attracting more customers, while direct mail and TV sales are gaining increasing acceptance. In addition, the decision making processes of Chinese consumers are becoming more complex than formerly. The tradition of spending below earnings is now challenged by consumer credit.

It is not difficult now to see Western influences in people's life style. The great tea-drinking nation has now given way to coffee drinking. Chocolate sales will go up on Valentine's Day. Cognac has invaded the territory of the traditional Chinese liquor, making China one of the largest cognac consumers in the world. Coca-Cola and Pepsi-Cola penetrated the market with their 'herbal medicine tastes'. Marco Polo's mistaken imitation of Chinese-style stuffed pie “ pizza, with its stuffing on top rather than inside “ has made a successful inroad into the country of great food culture. Completely Western fast-food concepts such as McDonald's and Kentucky Fried Chicken are embraced by Chinese people, particularly the younger generation. Christmas has now been celebrated unofficially by young non-Christian Chinese as a fashionable event. Interestingly, dogs and cats are now not only delicacies on dinner tables, but also loved and cared home pets. As a result, there are increasing numbers of pet hospitals in large urban centres of China. Pet foods are now advertised on the TV and other media.

Recent trends in the composition of consumer spending

Although consumer spending on food is steadily declining, food still remains at the top of average consumer spending, followed by recreational , educational and cultural services, housing, clothing, etc. (see Table 1.7.12).

However, the consumption of food is no longer seen as satisfying basic needs. The composition of food consumption is shifting toward more nutritious pursuits, which was reflected in the significant declines in spending on food grains. The consumption of non-staple foods, such as meat/poultry and their processed products, aquatic products, dried and fresh fruits, milk and dairy products, has been on the rise. The pursuit of healthier foods has also resulted in the decline in per capita consumption of fine grains and pork.

The second largest category of spending is spending on recreational, educational and cultural services. The adoption of the 40- hour week and improved working conditions have given people more time for leisure activities and educational pursuits, and the related spending has been increasing. In 2001, 13 per cent of disposable income or RMB 690 per capita was spent on such services. In 1997 the figure was only RMB 448.4.

Housing reform has brought about increases in housing expenditure. The objective of the reform is to transform government-provided free housing into private housing ownership. Under such a scheme, apartments are sold to individuals or provided at cost. In 1997 the per capita spending on housing, including water, gas and electricity, was RMB358.6; by 2001 the figure had risen to RMB548, an increase of 52.82 per cent. Spending on housing is expected to continue to increase in the years to come.

Per capita spending on clothing also registered an increase in 2001, and is 6.63 per cent up on 2000 but only 2.47 per cent above 1997. In fact, spending dipped to RMB 480.9 in 1998 from 1997's RMB520.9. In 2000, spending on clothing was still less than in 1997. In 2001expenditure picked up and rose to RMB533.7.

With reform of the medical care system, medical expenses that used to be covered by the government are now increasingly paid by individuals. Per capita out-of- pocket expenditure on medical services and healthcare was RMB180 in 1997. In 2001 spending on this category had increased to 343.3 per capita. The deepening of medical care system reform will result in increased medical expenditure in the next few years.

Modern life demands convenient transportation and communications. Consumer spending on transportation and communications has been increasing at a high rate in the last few years. In 1997 per capita spending on transportation and communications was RMB233 yuan, an increase over the prior year of 17 per cent, while in 2001 the figure almost doubled to RMB 457, an increase of 15.7 per cent over 2000. The key drivers of the increase are increased interest in travel as a result of the increase in income and increased mobile telephone consumption.