20110130 mdc china retail sector - macro trends

8/3/2019 20110130 MDC China Retail Sector - Macro Trends

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China Retail Sector - Macro Trends

January 2011


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Development prospects of China retail marketChinas personal consumption will increase in a rapid yet stable manner in the next 5-10 years. Tables

below show that, the percentage of consumption / GDP of China is only 35% which is the lowest comparedwith other developed countries. Meanwhile, the growth rate of consumption of China is 6.9% from1998-2006 which is the highest in the world.

China still has extensive room for market growth.

(Data source: CICC research report, 2009 )

2

Extensive Room in Retail Sales Growth in China

73%

71%

67%

65%

60%

58%

57%

55%

35%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mexico

USA

UK

Brazil

Canada

France

India

Japan

China

Consumption of residence / GDP

6.9%

5.3%

4.1%

3.5%

3.5%

3.2%

2.6%

1.4%

1.3%

0.9%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%

China

India

Mexico

USA

Canada

UK

France

Japan

Brazil

Germany

Growth rate of consumption in 1998-2006


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Chinas retail industry has reached astable and high-speed development stage

Since the beginning of the 21st century,Chinas retail & consumer products industryhas enjoyed high-speed development with anannual average growth rate of over 10%. Inthe future, Chinas retail market willcontinue to share the benefits from the fastdevelopment of Chinas economy andincreasing personal consumption. Thefollowing factors have contributed, and areexpected to continue to contribute, to thegrowth of the retail industry in China:

Development Prospects in Chinas Retail Industry

3

472 520581 634

718 811977

1,221

1,5861,831

9.7%10.0%11.8% 9.1% 13.3%

12.9%20.6%

25.0% 29.9%

15.5%

-20%

-10%

0%

10%

20%

30%

40%

0

500

1,000

1,500

2,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total retail sales of consumer products (in billion dollars) Growth Rate

Rapid Urbanization

Increasing Middle-Class Population

and Improving Social Security System

Inflation Pressure Helps

Retail Sales Growth

Government Policies Encourage

Increase in Consumption

China Total Retail Sales of Consumer Products and Growth Rates

Urbanization has led to higher income for the urban population, which

drives higher retail sales

Moderate inflation will be beneficial to retail sales growth

Government policies are directed towards increasing domestic

consumption to replace investments as the top driver in economic growth

A bigger middle-class and an improving social security system boost

consumer confidence higher and foster mid to long term consumption


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Increasing Disposable IncomeAccording to the National Statistics BureauReport, the annual average growth rate ofChinas urban disposable income per capita is13%. A majority of economists believe this rateshall be above 12% for the next 5-10 years.Increasing disposable income is beneficial tostrengthen marginal consumption andincrease the consumption of non dailynecessities and luxury products.

Rapid UrbanizationDue to the huge differences in consumptionability between urban and rural populations,urbanization shall lead to a fundamental changein Chinas consumption volume and types.According to Chinas current statistics, a 1%increase in urbanization shall increase theultimate consumption by 1.6%. In recent yearsChinas urbanization has increased rapidly andurban consumption has increased accordingly.

Increasing Disposable Income and

Rapid Urbanization

4

8,748 9,42210,493

11,759

13,786

15,78117,175

8.0% 7.7%11.4% 12.1%

17.2%

14.5%

8.8%

-20%

-15%

-10%

-5%

0%

5%

10%

15%20%

0

4,000

8,000

12,000

16,000

20,000

2003 2004 2005 2006 2007 2008 2009

RMBChina Urban Disposable Income per capita 2003-2009

0%

20%

40%

60%

80%

100%

China Japan KoreaUSA Developped regions Developing regionsAverage level

China Urbanization vs Worldwide


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Increasing Middle-Class PopulationFrom 2009 to 2015, 75M China urban

families will be categorized as middle class(annual household income

RMB50,000-120,000). Chinas consumptionper capita is projected to increase from

RMB14,300/year in 2009 to RMB 17,000/

year in 2015. Total consumption of the urban

population increased to RMB13,300 billion/

year (USD1,940 billion) by 2015. Themiddle class population will become a major

driver of future consumption. Majorconsumption demand on daily products shall

grow to other non- necessity products such as

brand name clothing, cosmetics, jewelry andother non-essential goods.

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A Bigger Middle-Class and An Improving

Social Security System

23.2%

35.3%

27.4% 26.0% 24.9%

14.5%

6.8%

0%

5%

10%

15%

20%

25%

30%

35%40%

Total

volume of

retail

Jewelry Clothes Food Electrical

appliance

Building

materials

Furniture

Growth rate of the main retail industries in 2010

Source: National Development and Reform Commission,

Improving the Social Security SystemFrom 2008-2010, government fiscal investment in social securities was 249.1 billion, 290.6 billion

and 318.5 billion respectively. The improving social security system shall benefit stableconsumption and stimulate the long-term consumption.


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6

Inflation Pressure is Beneficial to

Retail Sales Growth

Retail sales have always had a strong correlation withCPI, especially with the CPI 6 months lagging data.

Chinas CPI grew to a 28 month high of 5.1% inNovember 2010.

2010 inflation was 3.3%, 2011 expected CPI will bearound 4%, and retail sales growth will increase to

18.6% in 2011 from 18.4% in 2010.

Inflation results in higher goods prices and willdirectly drive up the sales amount of retail enterprises.

The level of inflation will determine the howsuppliers, retailers and consumers are affected as a

result of inflation.

Generally, for general merchandise, it is difficult topass all the change in costs to consumers because of

the availability of substitutes and competition amongretailers.

Retailers that have good distribution channels willhave stronger bargaining power with suppliers andapply pressure to keep costs low.

Moderate inflation is usually the most beneficial todepartment stores operators. Luxury goods are notsubject to price control like necessities and can raise

their prices even with inflation.


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7

12th Five Year Plan Boosts Internal

Consumption and Improves Living Standards

In the 12th Five Year Plan, Chinas government is committed to increasing the proportion of household incomein the national income and wage / salary income in total income and will seek to reduce the proportion ofnational income that accrues to the government and large corporations while substantially and continuouslyincreasing wages and salaries.

To boost domestic household consumption, Chinas government is implementing unprecedented policyinitiatives to raise Chinese residents disposable income, build a well-developed social safety network, push the

development of economic housing, and promote consumer finance.

Disposable Income China has already implemented policies this year to raise the minimum wage in a dozenprovinces by 12-29% with more to come in 2011. There is also a plan to lift the threshold of income tax

payment, which is currently at RMB 2,000 per month, and to increase the salaries of civil servants. Consumer Finance One of the major bottlenecks in boosting consumption in China lies in the under-

developed consumer finance industry. Notably, consumer loans outstanding per capita in China by the end of

2009 only amounted to US$608, less than one-tenth of $7,934 in the US. This presents significant room for thissector to grow to boost the consumption of many consumer discretionary products.

Over recent years China has indeed encountered an imbalance between consumption and investment, with theinvestment to GDP ratio rising from 35% in 2000 to 48% in 2009 and the consumption to GDP ratio falling

from 46% to 36% during the same period, the Chinese governments aggressive and unprecedented measures

should, along with several favorable macro-trends, result in substantial increases in domestic consumption as apercentage of GDP over the next 5 years.


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20 and 30 years old will become the main consumerswith a stronger desire for consumer goods

Besides Macro Economic Conditions, Other Social

Factors Are Also Favorable to the Retail Markets

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Changes in Population Structure

and Consumption Patterns

20s

ConsumptionCharacteristics

1) Most of them are an only child (from the One Child Policy)

with higher consumption behaviors2) Over time the internet will make their consumption patterns in

line with the changes from the rest of the world 3) Spending does not have to be limited by their own income.

Parents could provide them additional spending power4) The next baby boom will drive another wave of consumption

as these younger couples have their own child

Higher

Demand for

Consumer

Goods

30s

Consumption

Characteristics30s+ new ways of shopping (e.g. online shopping)


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Chinas Retail Markets are Highly Fragmented

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Chinas retail sector is very

fragmented

The highly fragmented retail markets in China provide a compelling opportunity for investors

to create new market leaders

20110130 mdc china retail sector - macro trends

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