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Economics: Charge It - The Chinese Consumer is Ready to Roar!
New York: December 06, 2004
By John R. Stephenson

Americans are a consuming nation and the Chinese are savers and investors - or so the conventional wisdom goes. Recent economic data seems to confirm that view with American savings plunging to 0.2% in October (down from 0.3% in September) and with the share of U.S. GDP from consumption surging to 71% in the 2002 timeframe. America has become the world's shopping mall. But will this always be the case?

Probably not! For starters, this unbridled consumption binge that has so far served to prop up the U.S. economy seems, at best, difficult to sustain. With an enormous current account deficit (exports minus imports) of nearly 6% of U.S. GDP sapping up some 83% of the total world savings pool to finance (according to the International Monetary Fund), it seems unlikely that our creditors are going to allow the party to continue indefinitely - at least not on such favorable terms (low interest rates). Not to mention the fact that Americans are getting older with the first wave of the baby boom generation starting to retire in 2008, a natural shift from spending to saving seems all but inevitable.

Luckily, there may be a new engine of global economic growth emerging - China, which will likely challenge the U.S. as the world's largest consuming nation in the decades to come. Last week, various Southeastern Asian nations and China signed an accord to create the world's biggest free trade zone by the end of the decade. As well, China is taking steps internally to transition from an export/manufacturing-led economy to a consumption-led economy. As former Chinese leader Deng Xiaoping said in 1982, "It is time to prosper. China has been poor a thousand get rich is glorious." China, the sleeping giant, is starting to awake and investors had better take note.

There are several factors that, in our view, are likely to result in China becoming the world's largest consuming nation. There is the strong overall economic growth rate of 9% a year (as compared to U.S. growth rate of 3.6%), a rising urban population and a currency that is likely to become more valuable over time. As well, a saturation point is occurring in the U.S. marketplace, as there are more houses than households and more cars than people with driver's licenses.

Within a thirty-year period (1994 to 2024), China's urban population is expected to rise from 350 million people to 750 million people (13 million people migrate from the rural areas to the urban areas every year). This migration is driven by expectations of strong wage growth with incomes of urban dwellers rising 99.7% over the last nine years versus a 53.1% rise in rural incomes. Not only do the folks in the city make more money than their country cousins, but they spend more money - some 80% of all national spending. This rural/urban migration is coming at a time when the overall Chinese population is continuing to surge with some demographers estimating that China's population will peak in 2014 at 1.3 billion people and then start a gradual decline. Another feature of China's population is that it contains a much larger proportion of older people than is typical in most emerging markets.

As the banking and financial system in China continues to develop and evolve, a greater availability and reliance on credit is likely to occur which will further increase China's impact as a leading consuming nation. CSFB, a leading investment bank, believes that household spending will grow by an average of 17 % over the next ten years. Not only is the consumption likely to be strong but also it is growing from a relatively small base. The growth rate is likely to be strongest for automobiles and personal computers where ownership levels significantly lag those in the west. China already leads the world as the largest consumer market for televisions (1991), mobile phones (2001) and fixed line telephones (2002).

For investors looking to benefit from the rise of the Chinese consumer, we believe the best opportunities exist in the food and beverage categories and personal care sectors. Although the growth in automobiles sales is likely to be strong, there has been an enormous growth in manufacturing capacity which should reduce returns to investors. The rising affluence of the Chinese consumer has been accompanied with an increasingly western lifestyle. The most frequently consumed beverages during meals - soft drinks. Beer is the drink of choice for a night on the town with 12% of the population drinking domestic beer and 7% drinking imported beer. Restaurant dining is on the rise as well with the average consumer visiting a restaurant 4.6 times a month. Their choice of dining spot? Twenty-five percent of the time it is a western fast food restaurant such as McDonalds or KFC. Another bad habit the Chinese have picked up? Smoking, where some 29% of the population smokes (54% of men and 4% of women).

Already companies such as Coca-Cola and Anheuser-Busch have been targeting China as their most important growth market for the next decade. As an investor, doesn't it make sense to consider China as part of your investment strategy?

Figure 1: Global Stocks Best Positioned to Benefit from Increased Consumer Spending in China

Source: Company data, CSFB estimates



StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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