After three decades of double-digit growth, fuelled by high levels of export and investment, China’s economy has seen something of a slowdown. The country is facing a number of structural issues as it progresses from a manufacturing-led economy to one underpinned by services and consumer spending. Nevertheless, the underlying drivers of consumption remain and the government seems well-prepared to manage this transition. For the foreseeable future, China looks set to remain the global growth engine. Katy Askew reports.
China is the world’s most populated country. According to official Chinese data, the country accounts for 19.1% of the world’s population with over 1.36bn inhabitants. With that many mouths to feed, the opportunity for the food industry is hard to overstate.
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China is also an increasingly prosperous country. Higher wages and a growing middle class are one of the key drivers of consumption in emerging markets, as a richer population has more money to spend on products and services that enhance living standards. Growing wealth provides companies operating in areas such as the food sector with a larger consumption pool from which to draw and affords the opportunity to move those consumers up the value chain.
China’s middle class has seen explosive growth in urban areas. According to research from McKinsey and Co., 75% of China’s urban consumers will earn CNY60,000 to CNY229,000 (US$9,000-34,000) a year by 2022, up from 68% in 2012 and just 4% in 2000. Within the next nine years China’s middle class will grow to around 630m people, approximately 45% of the total population.
What will this mean for how and what consumers buy?
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China is already the world’s largest food and grocery market, with sales of more than US$1trn in value. By 2016, sales are expected to grow to $1.5trn, research firm IGD predicts.
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By GlobalDataMuch of the growth is likely to come at the upper end of the value spectrum.
Since the turn of the century – within the space of a generation – the number of middle-class consumers has dramatically increased. Consumers who knew the less prosperous circumstances of the 1970s and 1980s have often focused on safeguarding financial security. In contrast, consumers born in the mid-1980s, after China began to implement sweeping economic and social reforms, tend to have very different spending priorities. According to McKinsey, these consumers are more “westernised” in their attitude to consumption, are brand conscious and commonly view more expensive products as intrinsically “better”. Often referred to as “G2”, this group accounts for around 15% of urban consumption and this level is expected to grow to 35% over the next ten years.
Growth of China’s middle class is also expected to be weighted to the upper middle class bracket and this social group is likely to be another of the principle engines driving consumer spending.
Food is often viewed as a necessary expenditure. Nevertheless, these demographic trends present an opportunity to move consumers up the value chain. Food produced by foreign players, in particular, is still viewed as higher quality and multinational food groups can leverage this advantage to hit higher price points.
The expansion of China’s middle class represents an opportunity for the food sector in the near term. It also presents the country with a considerable structural challenge. As wages rise, China’s manufacturing-led growth is coming under pressure because the country’s export industries are losing the pool of cheap labour that has made them so competitive on the global stage.
“Rising wages do mean that manufacturers in lower value-added sectors like textiles and furniture will need to find lower-cost options, in some case meaning finding other production centers in cheaper parts of China, in others relocating manufacturing centres altogether to countries like Vietnam and Indonesia. However increases in worker productivity as well as the efficiency of its infrastructure mean that China is still an attractive place for many manufacturers, particularly those that are higher up on the value chain,” James Roy, senior analyst at China Market Research Group, says.
The result has been a slowdown in GDP growth. According to the latest official figures, China’s GDP growth in the first nine months of the year stood at 7.7%. While September saw a dip in export levels, the country is on-track to hit the government’s target of 7.5% GDP growth for the full year. This level of growth is certainly healthy when compared to most of the sluggish global economies. However, it also represents a considerable slowdown for China and is the lowest growth rate since 1999, when the country was hit by the economic crisis in Asia.
“In some areas of China, certain products that have a very high labour content can no longer be manufactured cost effectively. That is why companies have a much higher degree of mechanisation now compared to ten years ago. But that is also ultimately part of the economic cycle – to move away from a manufacturing-based export economy to one that is much more driven by consumption, services and higher knowledge,” AT Kearney analyst Torsten Stocker tells just-food.
As China’s economy develops, the Chinese government seems bent on managing for growth. While the heady days of double-digit GDP growth could be behind China, the reform package unveiled by Beijing earlier this month is designed to foster slower – but well-balanced and sustainable – economic expansion.
The Chinese government is working to balance the need to restrict population growth against the looming threat of a rapidly ageing population. People above the age of 60 now represent 13.3% of the total population, up from 10.3% in 2000. In the same period, those under the age of 14 declined from 23% to 17%. A continuation of these trends will place greater burdens on those of working age and government schemes such as pensions and healthcare.
In response to this concern, Chinese couples where one person comes from a single child family will now be permitted to have two children. These couples will join the ranks of other consumers allowed more than one child – rural Chinese, ethnic minorities and families where both parents are only children.
News that China will relax its one-child policy prompted a jump in the share price of infant nutrition companies, such as Mead Johnson, as well as local players including Mengniu and Yashili. Investors are betting the easing of the rules will provide a boost to child-facing consumer goods companies. “We view this development as a positive for Mead,” Jon Andersen, an equity analyst at US investment bank William Blair, said in the wake of the announcement.
However, Euromonitor analyst Lamine Lahouasnia suggests that the impact of this reform has been somewhat over estimated. “The slight relaxation in the one child policy everyone is bigging up as though it is going to be some kind of huge change in the demographic structure of China. We have had a look at some numbers and we think that only 10% of the population are going to be eligible at the moment to have a second child that weren’t previously eligible… Whilst it is definitely a positive thing for food – there are going to be more mouths to feed and food companies are certainly going to look at that in a positive light – it is not going to be a dramatic boost in population.”
Possibly of greater significance for China’s economic outlook was Beijing’s move to relax some of the rules governing migration between rural and urban areas under the hukou system of household registration.
The division between the standard of living in urban and rural China is stark. According to the latest information from the National Bureau of Statistics China, urban dwellers earned 3.23 times as much as people who live in rural settings in 2010. Moreover, rural inhabitants are restricted from moving to cities under the hukou system. The Chinese government’s latest reform package has eased these restrictions and rural migrants to cities will now be able to gain access to services like education and health insurance. This should speed urbanisation.
In addition, the latest set of reforms tackle the issue of rural land ownership, affording rural inhabitants the opportunity to sell their small-scale farms when they move to urban areas. Ultimately, this could speed the development of China’s agricultural sector, which is moving towards a large-scale model.
The adoption of modern agricultural practices would see the efficiency of land usage improve – with the adoption of more effective, higher yield techniques. It also has positive implications for the long-term reliability of the supply chain in a country that has been plagued with successive food safety and contamination scares.
Click here for the rest of just-food’s management briefing on China.
