Capturing the opportunity from China’s consumption premiumisation

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Shopping festivals are proof of the strength of consumption in China, as shown by the 43.5% year-on-year surge in e-commerce sales on ‘Singles’ Day’ (11 November). Along with the rapid expansion of the country’s middle class, we expect private consumption growth to remain strong, with a gradual shift towards discretionary and services/experience-related – more premium – consumption, facilitated by a mushrooming e-commerce infrastructure.

Shift in consumption patterns

Faster income growth allows for a quicker steepening of the penetration curve in many categories and a shift in consumption patterns occurring in three main ways:

  1. From staples to discretionary
  2. From mass to premium
  3. From goods to services/experience-related purchases

This shift is underpinned by an ageing population and rising per capita income. Overall consumption growth has continued to outpace that of investment growth, indicating further progress on rebalancing China’s economy.

Share of discretionary spending on the rise

Source: CEIC, Morgan Stanley Research, as of 13/11/2017

E-commerce: better infrastructure, easier credit

The ‘Double-12 Festival’ (12 December) should again show how robust Chinese consumption is, with several factors explaining what is likely to be impressive online sales growth:

  • Better infrastructure: more internet access/smartphones, rapid expansion of e-payments and improving logistics network mean households have better access to e-commerce. Internet penetration in China rose from 34% in 2010 to 54% in June 2017.
  • Financial innovation: consumer credit has become more easily available to younger consumers who tend to be more eager to borrow to increase their spending.

Total online sales of USD 38.2 billion on ‘Singles’ Day’ were double those in the US over the five-day Thanksgiving weekend. Nonetheless, China’s total consumption is only one-third that of the US, meaning there is considerable further potential for spending on services and by rural consumers.

Services accounted for 68% of US household consumption in 2016, but stand at only 49% in China, where rural populations’ spending is lagging. Rural society represents 43% of the total population, but only accounts for 22% of total household consumption, so boosting rural and services consumption is crucial.

Our Greater China equities investment team expects private consumption growth in real terms to remain solid, while retail sales growth is likely to accelerate as CPI inflation gradually increases. The labour market remains relatively strong and household income growth should continue to improve. Consumption in China should become an increasingly important driver of aggregate growth and could present significant opportunities to invest in the companies driving this trend.


The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Caroline Yu Maurer

Head of Greater China equities

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