China's long march to malls

Over the weekend a friend returned from a business trip to China. As usual he began his travelogue over the dinner. Although I was listening, somewhere I lost track as I shuttled between the living room and the kitchen to keep the table adequately supplied.

In between, I heard my friend say, "He has a cult following among Chinese urban youth."

I didn't catch the first part of the sentence and was not clear who he was referring to. Considering my friend's past political affiliations I concluded it was about Chairman Mao he was talking about. In the college hostel, my friend was the resident communist ideologue and for some time he made us all believe a Chinese model revolution was on its way to India. While many of us waited in vain for the revolution, he quietly moved to the US to earn his MBA.

Back on the dining table, I could not resist the urge to give my intellectual input to the conversation my friend began and said: "Despite all the controversies surrounding the Cultural Revolution, it is surprising that Mao still has such massive following among the Chinese youth."

Suddenly everyone burst into laughter.

For a while I didn't understand what was going on. Eventually my wife volunteered to rescue me. She pointed to the picture of Colonel Harland Sanders, the smiling, white-haired man on the Kentucky Fried Chicken bucket on the table and said the whole conversation was about the Colonel and not Mao.

New era

China has indeed come a long way from austere times of Cultural Revolution to a new era of consumption (both public and private) revolution. Consumption (including government spending) on public services accounted for about 77 per cent, or 6.2 percentage points, of GDP growth in the first quarter of this year, while investment contributed 2.7 points, according to China's statistics bureau.

For 2011 consumption accounted for more than 50 per cent of the country's economic growth.

In the new age of consumption-led growth, it is not surprising that KFC has more takers than the relics of the proletariat revolution. KFC's parent Yum Brands Inc. reported its 2012 first quarter earnings last week, which included a staggering 73 per cent jump in profits. The company also posted 14 per cent rise in its first-quarter restaurant sales in China over the previous year.

Luxury goods

As consumption binge picks up, China is fast emerging as the world's biggest market for luxury goods. Last year, 14.5 million cars were sold in China, about 2 million more than in the US. Sales of luxury cars were up 30 per cent in the first quarter of this year. China's industrial revolution has created hundreds of thousands of dollar-millionaires.

Millions entering the middle class in China are expected to help hold the pace of growth in luxury goods demand despite a slowing economy, CLSA, an independent brokerage and investment group, said in a recent report.

The CLSA survey of 340 consumers and 31 luxury store managers in China's Tier 1-3 cities found that more than half have made or are planning a luxury purchase this year. Those who bought luxury goods in the past 12 months spent an average 10-12 per cent of their total household income on these items, demonstrating a high propensity to spend.

Analysts say cultural and demographic factors support growth of consumption spending in China. Younger and richer than their counterparts' overseas, Chin-ese consumers enjoy displaying their wealth. The mainland Chinese millionaires are 15 years younger than their overseas peers.

Despite a rapid rise in private consumption spending, the transition of China into a consumer-driven economy like the US may take much longer, according to the International Monetary Fund.

The Fund estimates that the ratio of investment to GDP is likely to remain above 45 per cent through 2017. Currently consumption totals around 35-40 per cent of China's GDP against 55 to 65 per cent in countries such as Japan, India, Taiwan and Thailand.

While there are clear signs that China is emerging a significant source of global consumption demand, in the face of the slowing economy, the nation probably needs a ‘great leap forward' in private consumption supported by lower inflation and easy monetary policy.