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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 and one of the most important economic centers in the world.

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 460 Yuan (Shanghai 2'738 Yuan) in 1980, to 1'634 Yuan (Shanghai 5'910 Yuan) in 1990 and 7'086 Yuan (Shanghai 34'547 Yuan) in 2000. It finally jumped to 10'561 Yuan, an equivalent to 1’300 US$ in the year 2004.

Per capita GDP of Shanghai reached 55'307 Yuan in 2004, an equivalent of about 6'830 US$. According to experiences made in South Korea and Singapore a threshold of 5'000 US$ may be a breakthrough to the new consumption pattern marked by the automobile. This seems to be true in China, too. According to World Bank standards, the living standard of the average Shanghai citizen already reached the middle level of a developed country.

Annual disposable income of Chinese consumers, which equals the total household income minus income tax and other social security contributions, and therefore refers to the final consumption budget, increased rapidly as well. Annual disposable income of Chinese urban residents was 1'510 Yuan per capita in 1990 (Shanghai 2'183 Yuan) and increased to 6'280 Yuan (Shanghai 11'718 Yuan) in the year 2000. The figure increased to 9'422 Yuan (Shanghai 16'883 Yuan) in 2004, corresponding to about 1’160 US$ (Shanghai 2'080 US$).

The Chinese propensity to save is very high. China keeps the highest national saving rate in the world since 2000, nearly to 50% of GDP. 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 10.36 trillion Yuan at the end of 2003, a growth rate of 19% compared to the year before. In Shanghai the sum rose to 696.1 billion Yuan by 2004, up from 25.2 billion Yuan in 1990. In accordance, the average per capita savings deposit in the city rose rapidly from 1'965 Yuan in the year 1990 to 51'472 Yuan in 2004.

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 2004, the Engel coefficient of the Chinese rural households had fallen to 47.2% from 49.1% in 2000, 58.8% in 1990 and 61.8% in 1980. The coefficient of the urban households fell to 37.7% from 39.4% in 2000, 54.2% in 1990 and 56.9% in 1980 (see "China Statistical Yearbook 2005", p.335). In the year 2004 therefore, rural residents used just about 47% of their income for food, whereas urban residents used more than 62% of their total consumption on items other than food. The most rapid development was rather recent, taking place essentially in the last decade at the turn of the two centuries. Table.1 shows the basic structure and the changes of the urban households during recent years in Shanghai.

3. Main Consumption Items

A very rapid change in consumption is visible through a list of dream articles in a rapidly developing Chinese economy. 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 become a TV set, a washing machine, a Hi-Fi-set and a refrigerator - each item worth more than 1000 Yuan. Since the middle of the nineties, however, the new hot items became personal computer sets, housing and cars - each worth some 10'000 Yuan or more.

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 interest 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 150 square meters. Lower- and middle-income families can afford modest apartments between 70 and 100 square meters. Few residents still rent apartments, quite often with government subsidies. Since 1999, the floor space of new residential buildings in China’s urban areas has been growing yearly by more than 5.5 million sq. meters, and per capita floor space of residential buildings in urban areas reached 25 sq. meters in 2004, whereas the figure was 20.3 sq. meters in 2000, 16.3 sq. meters in 1995 and 13.7 sq. meters in 1990.

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 ordinary people, considering the lower annual disposable income of Chinese urban residents. Average prices of living space nationwide were about 2'714 Yuan (335 US$) per square meter in 2004, up about 25% over the year 2001. The big cities of Shenzhen (6’756 Yuan), Shanghai (5’855 Yuan), Beijing (5’053 Yuan), Guangzhou (4’537 Yuan), and Hangzhou (4’248 Yuan) ranked among the most expensive across the country. The housing prices there can go easily up to 10'000 Yuan (1'210 US$) and as high as 50'000 Yuan a square meter, depending essentially on the location in the city or on the access to the metro system. Subways and light rail and buses network are main traffic factors influencing property prices.

• Automobiles
The second important item today is obviously a passenger car. Passenger car sales in China have grown strongly in recent years as incomes have risen. Statistics show that the ownership of private cars, including households and companies, totalled 26.94 million cars in the year 2004, and that is excluding those owned by the military units, of which 14.82 million were registered under personal use (See CEInet Economic Forecast, November 18, 2005).
China's car sales grew 15% in 2004, slowing from a 76% surge in 2003 and a 50% growth in 2002, as buyers held out for discounts amid competition. 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. However, car purchases have been encouraged by falling prices and the availability of car-financing deals, apart from the higher incomes of Chinese consumers. Since China entered the WTO in 2001, automotive import tariffs have been cut. This has not only resulted in cheaper imported cars, prices of domestically produced vehicles have also fallen, as local suppliers have resorted to discounting in an attempt to retain market shares. Car purchases in China, particularly in the big cities like Shanghai, will surely be a new passion in the next decade. The following factors are encouraging this tendency: per capita GDP in more and more cities is surpassing 5’000 US$, a threshold at which car buying appears to take off; car ownership rates remain low, at just 7 cars (in urban area: 22 cars) per 1,000 person, but that means a bigger room for a further development; car financing rates are still low, even at the 2003 peak, car financing accounted for only 20% of sales, far below the 70% proportion prevalent in advanced economies; the Chinese government will spend 220 million Yuan over the next five years to expand the nation's highway network to 50’000 kilometres by 2010, from the current 35’000 kilometres.

• 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 are improving very rapidly. Furthermore employees start to enjoy longer legal holidays since recent years.

While total number of international tourists coming to China was 5.89 million person-times in 1995, the figure went up to 10.16 million in 2000 and 16.93 million in 2004. Among the 16.93 million in 2004, 10.74 million were from Asia, accounting for 63%; 3.78 million from Europe, accounting for 22% and 1.66 million from North America, accounting for 10%. China's receipts from international tourists reached 25.74 billion US$ in 2004, a rise of almost 48% over the previous year, compared to 16.22 billion US$ in 2000, which represented a rise of 15% over the year before.

China surpassed Japan in 2003 in the number of outbound travellers and became Asia's main source of international tourism. Outbound travellers totaled 28.85 million person-times in the year 2004, an increase of 176% over the year 2000. Among them, travelling for private reasons concerned 22.98 million person-times, accounting for 80% (compared to 54% in 2000). As many as 100 million Chinese mainland citizens are expected to travel overseas in 2010 according to the World Tourism Organization.

Chinese tourists are not only increasing rapidly, but are more influential as well. While their spending per single trip in 2004 was second in the world to Japan, Chinese tourists were the biggest shoppers, as one-third of their tourism spending went to shopping. According to a survey by AC Nielsen and the Tax Free World Association in March 2005, Chinese tourists spent an average 987 US$ (808 Euro) per capita during a trip abroad. Estimated by another source, the Chinese travellers consumed 25 billion US$ worth of goods abroad in 2004, and the value will rise to 30.5 billion US$ in 2008. This is no surprise, as the Chinese who can afford to travel abroad are mainly families of business people and high-ranking officials, whereas many of the Japanese tourists are students and pensioners.

The top travel destination of outbound travellers was Asia. Hong Kong and Macau alone accounted for 70% of the total. Europe received only 7% of the Chinese outbound travellers, but more and more people are likely to fly to European countries due to rapid expansion of nations given “Approved Destination Status”, which allows Chinese mainland citizen to travel to these countries, too.

• Luxury Goods
A recent report by the international consulting firm Ernst & Young reveals that Chinese consumers now spend 2 billion US$ on high-end fashions and accessories including fine jewellery, expensive watches, luxury sedans and other luxury goods that's about 12% of global sales. The figure makes China the world's third-largest consumer of luxury goods, next only to Japan and the United States.
Most of the world's leading luxury goods suppliers are expanding their operations on the Chinese mainland so as to enhance their presence on the complicated and challenging market. The consultant firm predicted that the sales of luxury goods will grow by 20% annually between 2005 and 2008, and the rate will cool down to 10% in the period of 2009-2015. The sales will exceed 11.5 billion US$ by 2015, or 29% of the world's total.

The biggest problem for luxury brand retailers in China is counterfeiting. However, some experts believe that the wide availability of counterfeits in China should not impede makers of luxury goods as they help to build brand perception and consumers are likely to upgrade to the genuine product when they can afford it.

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 an important gold processing centre. 70% of the total national gold jewellery in 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. 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.

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

Figures from the China Association of Fragrance, Flavor and Cosmetic Industries show that sales of personal care and cosmetic products grew from 4 billion Yuan in 1990 to 33.5 billion Yuan in 2000 on the Chinese mainland and reached 58 billion Yuan (7.2 billion US$) in 2004. Experts predict that sales of cosmetic products will continually grow at a double-digit rate over the next few years.

China's share on the global cosmetic market today is still small, only about 5%, compared to huge markets like the U.S. and Japan, but with a population of 1.3 billion people and a strong GDP growth the market will keep expanding at a rate of about 8%. China has obviously the biggest potential for further increases in sales of cosmetic products. There are around 5’000 firms in China producing cosmetic goods, however the products are mostly at lower or middle level. China's high-end cosmetic market is dominated by foreign funded companies. The world's top 15 brands, such as L'Oréal, 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 Consumer Sense and Consumption

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. According to statistics by end of June 2004, however, loans for housing mortgages and car-purchases still accounted for a majority of 83% out of the total consumer loan business.

In the past few years, the operating risk of the banks increased due to lack of reliable client-credit information. By the end of June, 2004, the outstanding individual consumer loans for automobiles were 183.3 billion Yuan (22.6 billion US$) in China, among them however, almost 100 billion Yuan (12.3 billion US$) were bad loans, accounting for 40% of the total. Under these circumstances, China is preparing to start a personal credit assessment system, which inevitably has 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 in 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. According to the latest national population census, the Chinese population as a whole reached 1’265.8 million inhabitants in the year 2000, an increase of only 11.7% against 1990. The up-to-date figures by the year end of 2004 through sample survey are 1’299.9 million inhabitants for China and 17.42 million inhabitants for Shanghai. 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, totalled about 20 million persons today. This is actually the real figure which has an impact on the consumer goods market in Shanghai.

Another important development is the increase of the educational level of the population. 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. 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%. The corresponding figures for the whole country, however, are much lower. Chinese government therefore worked out an ambitious plan which sees the number of citizens with an educational degree of Junior College or higher of 13’500 persons out of 100’000 by the year 2020.

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 and above, accounted for 11.5% of total permanent residents in 2000, an increase of 2.1% compared to 1990. According to the latest National Population Sample Survey, elderly population accounted even for 15% of total permanent residents in 2004. 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 people rich at first. But now, money in consumers' pockets is increasing everywhere.

Meanwhile, the RMB sees a steady, managed appreciation. With an initial rise of 2.1% against the dollar, the central bank of China announced this July that the Renminbi (RMB) would no longer be pegged to the dollar, instead it will be managed against a basket of currencies. However, China's new currency regime has not stopped the appreciation pressure for the RMB, and this will inevitably increase the purchasing power of the Chinese consumers and affect their appetite for luxury goods in particular.

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 changing structure.

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.

LI Rongzhang

Table. 1
Urban Household per capita Consumption Expenditures in Main Years In Shanghai

Source: Shanghai Statistical Yearbook 2005, p. 180

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

A. According to the latest National Population Census in 2000

B. According to the latest National Population Sample Survey in 2004*

*The total sampling population is 1’253’065 in China and 16’702 in Shanghai.
Source: China Statistical Yearbook 2005, p. 102

13.12.2005

Consulate General of Switzerland
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