Personal consumption of the Chinese people today is undergoing important structural changes - not only in terms of quantity and quality of the goods consumed, but also as far as the range of purchased goods is concerned.

In analogy to Maslow' s pyramidal structure of human motives, personal consumption is usually divided into three types from "having enough to eat" to "emphasizing enjoyment" and finally to "self-development". It is widely acknowledged that welfare and living conditions of Chinese consumers have passed the first type and entered a new and higher stage. This is especially true for Shanghai and her surroundings, one of the most developed regions on the mainland. The city has a clear aspiration of becoming the economic capital of China.


1. Fast Growth of Income

Structural changes in personal consumption are basically due to the rapid growth of the Chinese economy and to the accompanying increases in personal income. Fast and sustained economic development has increased China's per capita GDP from an average of 379 Yuan (Shanghai 2'498 Yuan) in 1978, to over 1'600 Yuan (Shanghai 10'000 Yuan) in 1990. It finally jumped to 7'078 Yuan (Shanghai 34'600 Yuan) in the year 2000. Per capita GDP of Shanghai reached 37'300 Yuan last year, an equivalent of about 4'510 US$. The threshold of 5'000 US$ for per capita GDP will probably be surpassed in 2003. According to experiences made in South Korea and Singapore this threshold may be a breakthrough to a new consumption era of the automobile in China, too. According to World Bank standards, the living standard of the average Shanghai citizen will therefore soon reach the middle level of a developed country.

Annual disposable income of Chinese consumers increased rapidly as well. Annual disposable income of Chinese urban residents was 1'510 Yuan per capita in 1990 (Shanghai 2'182 Yuan) and increased to 6'280 Yuan ( Shanghai 11'718 Yuan) in the year 2000. Last year the figure mounted to 6'860 Yuan (Shanghai 12'883 Yuan), corresponding to 830 US$ (or 1'558 US$ respectively).

The Chinese propensity to save is very high. Chinese people have a clear preference for saving rather than for spending money. As a result, total savings deposits of urban and rural residents in China reached 7.4 trillion Yuan at the end of 2001, a growth rate of 14.7% compared to the year before. In Shanghai the sum rose to 300.2 billion Yuan by 2001, up from 25.2 billion Yuan in 1990. In accordance, the average per capita savings deposit rose rapidly from 1'965 Yuan in 1990 to 19'098 Yuan in the year 2000.


2. Drastic Fall of Engel Coefficient

The law of Engel is a widely respected indicator for the level and structure of personal consumption and basically says that growing household incomes are accompanied by a reduction of the percentage spent on food. By the end of 2000, the Engel coefficient of the Chinese rural households had fallen to 49.1% from 58.8% in 1990 and 61.8% in 1980. The coefficient of the urban households fell to 39.2% from 54.2% in 1990 and 56.9% in 1980 (see "China Statistical Yearbook 2001", p.304). In the year 2000 therefore, rural residents used just about half of their income for food, whereas urban residents used more than 60% of their total consumption on items other than food. The most rapid development was rather recent, taking place essentially in the last decade of the 20th century.

Statistics also showed that consumer expenditures for service items in the big cities grew faster than the expenditures for food and clothing. According to a survey by the Shanghai Statistics Bureau, in for 2001 expenditure of the urban households for food and clothing fell 1.1% and 0.2% respectively compared to the previous year, while the expenditure for services went up 15.9% during the same period (also see Table.1).


3. Main Consumption Items

Many older Chinese still like to talk about the so-called big items of durable consumer goods. Before 1979, a bicycle, a watch a sewing machine and a radio set - each worth about 100 Yuan - composed the four big items of consumption at that time. But things changed fast. In the eighties, the main items had became a TV set, a washing machine, a HiFi-set and a refrigerator - each item worth more than 1000 Yuan. Since the middle of the nineties, however, the new hot items became personal computers, housing and cars - each worth some 10'000 Yuan. A very rapid change in consumer consumption is thus visible through a list of dream articles in a rapidly developing Chinese economy.

These new items of personal consumption describe consumer wishes in China today. Although differing levels of economic development on the Chinese mainland will have to be taken into account, in general the wishes are true for everybody. The incredible spread of modern information technology and the access to international media are a further source of fuelling wishes and aspirations of a modern consumer society.

The following items are clearly in the centre of interests at the moment:

- Housing
Nowadays, a significant number of urban families buy their residential property, usually by a combination of own savings and bank credits at low mortgage rates. The affluent buyers purchase larger apartments or villas surpassing living space of 100 square meters. Lower- and middle-income families can afford modest apartments between 70 and 100 square meters. Poorer residents still rent apartments, quite often with government subsidies.

Due to different kinds of taxes and fees, as well as the high profit margin of the real estate developers, housing prices are still too high for the ordinary people, considering the lower annual disposable income of the Chinese urban residents. Average prices of living space nationwide were about 2'200 Yuan (266 US$) per square meter in 2001, up nearly 6% over the year before. The big cities of Beijing, Shanghai and Guangzhou, ranked among the most expensive across the country. The housing prices exceeded 3'400 Yuan a square meter there and can go easily up to 10'000 Yuan (1'210 US$) depending essentially on the location in the city or on access to the metro system. Buses are usually very crowded, so the bus network does not really influence property prices.

- Automobiles
The second important item today is obviously a family car. Statistics show that the ownership of private cars increased from 0.82 million in 1990 to 6.26 million in the year 2000, an average annual increase of 22.6%. The costs for keeping a car in China are still very high, starting with the purchasing price and including yearly maintenance, taxes and insurance fees. A VW Jetta (CIX model), e.g., sells for around 100'000 Yuan. China's entry into the World Trade Organization and strong competition among vehicle producers in China will send prices downward very rapidly. A new passion for this consumption hot spot will surely be a consequence of these developments.

- Insurance
Since China reformed its free medical service system, a growing number of people have turned to insurance companies. In Shanghai, each urban dweller paid a record of 1'335 Yuan as insurance premium in 2001, an increase of 40% over the previous year. At the same time, the figure was eight or nine times the national average rate, clearly indicating a strong differentiation between urban and rural environments. Foreign companies play an increasingly important role in the insurance sector. 13.6% of the city's total premium and 12% of the life insurance premium last year were taken by foreign-funded insurance companies, among them are, for example, AIA, a wholly American-owned insurance company, and Taikang Life, a Swiss-Chinese joint venture.

- International Tourism
As China opened the door to the outside world, more people came into China and more Chinese went abroad. Tourism industry has become one of the fastest developing sectors in the country, as the living standards of people is improving very rapidly. Furthermore employees start to enjoy longer legal holidays since recent years.

The total number of international tourists coming to China was 83.44 million in 2000, up 14.7% over 1999. Foreign tourists numbered 10.16 million, an increase of 20.5%. Persons from Hong Kong and Macao numbered 70.1 million, a rise of 13.7%, and Taiwanese people accounted for 3.1 million, an increase of 20.3%. Among foreign tourists, Asian tourists numbered 6.2 million, a rise of 21.9%, accounting for 61.3% of the total; European tourists 2.4 million, a rise of 18.5%, sharing 23.3% of the market; American tourists 1.2 million, a rise of 18.6%, sharing 12.0% of the market. China's receipts from the international tourists reached 16.22 billion US$ in 2000, a rise of 15.1% over the previous year.

Chinese outbound travellers totaled 10.47 million in the year 2000, up 13.43% compared to 1999. Among them, business travellers numbered 4.84 million, accounting for 46.2%, down 2.5%. Travellers for private purposes counted 5.63 million, accounting for 53.8% of the total, up 32.0%. Top destinations of the mainland Chinese were Hong Kong, Macao, Thailand, Japan, Russia, the United States, Korea, Singapore, Viet Nam and Australia. The priorities in the destinations are still marked by strong government influence as destinations in Europe have not been opened for private touristic visits so far. Germany has been granted tourist destination already, but the implementation of the decision will only start in the course of this year.

- Luxury Goods, Watches and Jewellery
Usually speaking, elderly Chinese like gold jewellery, while the younger generation prefers white gold or platinum. For them, gold seems too heavy and old-fashioned. As a result, the share of platinum on the jewe1lery market jumped from 19% in 1990 to 33% in 1999.

Shanghai and Shenzhen are two cities playing a special role in China's jewellery and watch markets. With annual retail sales of over 2 billion Yuan, Shanghai remains the biggest jewellery market in China, accounting for about 15% of the country's total. Shenzhen, on the other hand, became a gold processing centre. 70% of the total national gold jewellery on value terms is produced in the city. The Shatoujiao Bonded Area (close to Hong Kong) alone contributes about half of Shenzhen's gold jewellery output.

Shenzhen is also one of the most important areas of watch production in the world. The watch output of Shenzhen reached 900 million pieces (worth 9 billion Yuan, of which 94% are exported) in 2001, accounting for 60% of total national output and 45% of the total world output.

Demand for foreign watches, particularly for Swiss watches, remains very strong in China. Foreign watches with good brand names, including very expensive ones, sell well in China, in particular along the rich coastal areas. However watch imports are strictly controlled by the government through non-tariff barriers such as import licences and import quota. According to customs statistics, China imported 314'300 pieces of mechanical watches in 2001 (up 18% over the previous year), with a value of 5.56 million US$ (an increase of 163%).

- Cosmetics and Beauty Business
As the living standard going up, more and more Chinese people, especially young urban women between 25 and 40m years of age, begin to pay more attention to their appearance. Therefore, cosmetics sales and beauty businesses grow rapidly in China.

According to the China Association of Fragrance Flavor and Cosmetic Industries (see "Shanghai Daily", 20.03.2002), sales of personal care and cosmetic products grew 15% on the Chinese mainland and reached some 40 billion Yuan (4.8 billion US$) during last year. Experts predict that the cosmetics industry will grow at a double-digit rate over the next few years.

China's cosmetics market is highly brand-oriented. The top 10 brands account for two-thirds of the market. The world's top 15 brands, such as L'Oréal, LVMH, Shiseido, Unilever, and Procter & Gamble, have all set up their counters in department stores in the main cities. Some of them (Auprès and Shiseido, for example) set up joint ventures, while others (for example Decleor from France) launched their own shops in mainland China.


4. Changes in the Consumer Sense and the Consumption Form

According to the survey conducted by the Commercial Commission of the Shanghai Municipality, the motives and preferences of the consumer in Shanghai changes into a typical pattern of an international metropolis. The structure is essentially the following one:

Shanghai is a very special place in China. The Shanghainese have a tradition of actively integrating into world civilization since the middle of the 19th century. They are willing to accept new concepts and start to lead consumption trends on the Chinese mainland. Exotic products find good consumer acceptance and easier access in Shanghai than in any other places in China. Walking along Hengshan Road, Huai Hai Road or going through Xin Tian Di, even day to day changes in the consumption mood become evident to the passer-by, not speaking of the changes the department stores, shops and boutiques have gone through in the last few years.

An important part of these changes of consumption patterns was initiated through consumer loans, introduced to China just a few years ago. Consumer loans have contributed a great deal to the promotion of China's personal consumption. Statistics released by the Shanghai branch of the People's Bank of China show individual consumer loans in Shanghai (mainly for housing mortgages and car-purchases) issued in 2001 to stand at 39 billion Yuan (4.72 billion US$), up 7.8 billion Yuan (943.17 million US$) from the year before. By the end of 2001 the outstanding individual consumer loans were 100.99 billion Yuan (12.21 billion US$) in Shanghai and 699 billion Yuan (84.5 billion US$) for the whole of mainland China.

As the operating risk of the banks increased due to lack of reliable client-credit information, many banks have limited lending targets or increased lending thresholds. Under these circumstances, Shanghai is preparing to start a personal credit assessment system - the first on the Chinese mainland. Inevitably, that will have a slowing effect on personal consumption within a short period of time, but in the long run, the measure will surely become a positive factor for the development of a sounder loan system, and for the expansion of the personal consumption as well.


5. Changes of the Consumer Structure

With rapid economic progress and strict birth control in China, the birth rate and the natural population growth were hold on low level. The Chinese population as a whole reached 1'265.8 million inhabitants in the year 2000, an increase of only 11.7% against 1990. Shanghai even became the first area (in 1993) in China to report a negative population growth rate. However, the above figures were all in terms of the "legal permanent residents" - a very special Chinese concept. In fact, people living in Shanghai, including immigrants from other provinces, working or doing business for a long time in the city, totaled 16.74 million persons by the end of 2000, a growth rate of 25.5% compared to 1990. This is actually the real figure which has an impact on the consumer goods market in Shanghai.

Table 2.
Age Composition of the Population in 2000 (China and Shanghai)

Another important development is the increase of the educational level of the population. Statistics shows that Shanghai citizens with an educational degree of Junior College or higher grew from 6'534 persons out of 100'000 in 1990 to 10'940 in the year 2000, an increase of 67%. Well-educated people, mostly in their twenties with many unconventional ideas about fashion and the world, will become the core purchasing forces in the decade to come.

The problem is, however, the fast growing number of senior citizens. The population of Shanghai has been aging at a far quicker rate than expected. As is shown in Table 2, Shanghai's elderly population, aged 65 or above, accounted for 11.5% of total permanent residents in 2000, an increase of 2.1% compared to 1990. This is obviously a clear sign of an aging society. For the municipal government the development has become a real challenge to improve the service for senior citizens. For the business community, however, it has brought new opportunities. Retirement homes must be set up. Consumer and/or health-care products suitable for senior persons should be produced; and more special educational programs should be created for the elderly.


Conclusion

The change of personal consumption undergoing in the Chinese market is fundamental. Given the size of the market, the world economy will eventually perceive its influence as well.

No doubt, the potential of personal consumption in China is substantial. Deng Xiaoping's reform and open-door policy has made some Chinese peopple rich at first. But now, money in consumers' pockets is increasing everywhere.

With China' s access to the WTO, the Chinese market will become more open, though remaining difficult for many reasons. But Swiss-made consumer goods, especially in the high quality field, should be able to find more opportunities on this market, due to its high quality consciousness and its higher structural level. However, opportunities always coexist with the challenges. Chinese markets are, as many expatriates have experienced, special and quite difficult markets. Any success of Swiss consumer goods on these markets will depend on the right market strategy, as well as suitable business tactics. Human resource management in particular will remain a key success factor in any Chinese market, given the strong cultural differences between China and Switzerland.

Table 1.
Urban Household per capita Annual Consumer Expenditures (Shanghai)

Source: Shanghai Statistical Yearbook 2001, P. 53


Li Rongzhang