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Unleashing the Chinese Consumer

McKinsey & Company Director Richard Dobbs at the Asia Society on Oct. 1, 2009.

McKinsey & Company Director Richard Dobbs at the Asia Society on Oct. 1, 2009.

NEW YORK, October 1, 2009 – In the second of a two-part series on China’s evolving economy, Directors from McKinsey & Company Richard Dobbs and Jonathan Woetzel took a look at current Chinese consumer patterns.

Speaking at Asia Society headquarters in New York, Dobbs said “Asia’s going to be a very big part of driving” the global recovery from the current financial crisis. With the emergence of a “billion new middle class consumers in India, in China, in Indonesia, and other parts of Asia,” the spending versus savings patterns of these new consumers will define the direction of the global economy in years to come.  

In the US and Europe, spending has traditionally “powered the global economy,” but now Westerners are cutting back, and saving more, due to pension deficits and an increasingly older population. As this demographic group begins to save more than it spends, it will shift the level of consumer spending from the West toward Asia.

In their report, If you’ve got it, spend it: Unleashing the Chinese Consumer, Dobbs and Woetzel look at the possible short and long term consequences for the nation’s consumer behavior.

According to Woetzel, China’s consumer market grew at an average rate of eight percent over the past 28 years. This substantial growth has led to China becoming the “sixth largest consumer market in the world” but at the same time it “is one of the lowest consuming countries in the world,” behavior not predicted to change significantly over the foreseeable future.

Why are Chinese consumers not spending? According to McKinsey, Chinese household incomes are lower as a share of GDP because of low Chinese wages and job scarcity. This is because until recently, the Chinese growth model has been “investment heavy and employment light.” As a result, lower income leads to less consumption. The report said Beijing also needs to invest a greater proportion of the country’s resources into infrastructure such as roads and building projects.

In discussion with moderator John Delury, Associate Director of the Center on US-China Relations, there were a number of suggestions made on how to increase Chinese consumption.

The key suggestions were to improve product demand and availability through modern store formats and better quality products; and to increase consumer access to credit which would lead to more disposable income and spending.

Reported by Faiza Mawjee