Doing Business with China

Market dynamics

China's consumer market continues to expand at impressive speed. The State Development and Planning Commission has predicted that, in the tenth five year plan (2001 “2005) period, China will continue to maintain a relatively high economic growth. The average annual increase rate of GDP is expected to be 7 “8 per cent with consumption raised to a higher level and urban and rural markets expanding further. By the end of 2001, total consumer spending, as reflected by total retail sales of consumer goods, reached RMB3,759.5 billion yuan, which is 10.1 per cent higher than the previous year. In spite of the small proportion of the urban population, urban dwellers account for two- thirds of the purchasing power.

DRI-WEFA, an economics consulting firm in Lexington, Massachusetts, rated China among the three top emerging markets with fastest growth and expected its consumer spending to grow by 11 per cent in 2002 (Keenan, 2002). However, at the current level, the consumer market is still undergoing a stress test. The rate of increase in consumer spending had already dropped by 0.6 per cent in 2001. In July 2002 the State Statistics Bureau reported that total retail sales of consumer goods was RMB309.66 billion. Though 8.6 per cent higher than the same month last year, the rate of increase was 1.2 per cent lower than the average annual rate in 2001. At the same time, the level of consumer spending dropped by 0.9 per cent for the same period. Market price remained stable for most of 2001 (See Table 1.7.14), but has showed a clear sign of decline since the last quarter of the year.

While market prices continued to fall for the first nine months of 2002, the savings rate did not cease to rise. A fresh report by the People's Bank of China, the central bank, revealed that by the end of July aggregate bank deposits amounted to RMB8,300 billion yuan, an increase of 7.5 per cent over 2001. This is characteristic of an emerging market where, on the one hand, there is a glut of goods and service of inferior quality, and on the other hand, consumers continue to save. The total balance of bank deposits by Chinese residents topped RMB 7 trillion yuan (US$853.6 billion), also a record high, earlier in 2002. When basic subsistence items like food, clothing and shelter are not in contention , quality products and services as well as the support infrastructure become the major challenge to boost the consumption level. The consumption emphasis in the cities is placed on housing, private cars , education and personal communication. All of these, however, are curbed by the inadequate infrastructure in financial services and telecommunication networks.

In the short run, prices are expected to come under further pressure as some import tariff reductions begin to take effect, and increased competition from cheaper imports may spur more price wars within China.

On the retail side, consumers' favourites are changing over time. A survey of 100 large department stores in December 2001 provides some insight into changing consumer preferences and priority of spending.

Table 1.7.17 shows the results of a survey of 200 supermarkets identifying 30 top sellers, which again reflects the changing consumption pattern of urban dwellers.