On the China Consumption Story; High-Fibre Diets Lower Diabetes Risk!

From: aditya rana
Date: Sat, May 30, 2015 at 2:13 PM
Subject: On the China Consumption Story; High-Fibre Diets Lower Diabetes Risk!

Hi!,

There has been plenty of focus in the media on China’s slowing economy and the dire need for it to rebalance by shifting focus to consumption. However, as McKinsey argues in a recent note based on the book “The One Hour China Book”, co-authored by their senior partner Jonathan Woetzel and private equity investor Jeffrey Towson, China’s consumer story is actually awesome and worries about China’s declining economic importance are misplaced. To summarise:

-The first phase in China’s growth rested on savings, investment and exports – getting people to move to the cities, work in factories to produce goods for exports, generating earnings which are then invested. The process allowed China to develop its infrastructure with largely its own cash, which stands in contrast with most developing nations which typically borrow from external sources, and then default – for example, the U.S. states of Mississippi and Florida which regularly defaulted on their foreign debt.

-The downside of investment led growth is a declining share of consumption as a proportion of GDP, with China’s consumption falling from 51% of GDP in 1985, to 43% in 1995, 38% in 2005 and 34% in 2013. In comparison, Japan’s consumption ratio is 61% and in the U.S. it is 68%. This falling share of consumption have led to calls for China to focus on growing domestic consumption to revive its slowing economy.

-There are three main reasons why this concern is somewhat misplaced: 1) From 2000 to 2010 the size of the Chinese economy more than doubled and consumption grew from $650 billion to $1.4 trillion, but since then has really accelerated to reach $2.1 trillion by 2013 making it the second largest consumer market in the world. So regardless of its share of GDP, it is the fastest growing consumption market in the world in absolute terms. 2) It is estimated that by 2020 Chinese consumption will reach $4 to 5 trillion. 3) Estimates for consumption, investment and net exports are probably very inaccurate – consumer spending in very difficult to estimate in a large and complex economy like China.

-Therefore, the key number to focus on is household income which is what drives consumption. China’s household income is huge – likely now to be over $5 trillion a year (and that’s not including unreported income). China’s household income is significantly larger than that of other EM countries (as he chart below illustrates).

-Spending on discretionary items (things which are not essential) is the fastest expanding category and is expected to grow by more than 7% until 2020, while “semi-necessities” are expected to grow by 6 to 7% and necessities by 5% (see chart below).

-This spending increase is coming mainly from the middle-class (with annual income over $10,000) , a group that did not really exist 10 years ago and is largely an urban phenomenon.

-Most of this income will not be in big cities like Beijing or Shanghai, but in the more than 600 cities with populations in excess of 500,000 (by comparison the U.S. has only 30). “Urban clusters” linking 10 to 60 cities and having 30 to 80 million people are being formed and each such cluster is about the size of a big European country.

-Within the middle-class category, the emergence of “mainstream consumers” with household incomes of $16,000 to $34,000 is significant, and they are expected to rise from just 6% of urban households in 2010 to 51% by 2020 (an annual growth rate of 26% – see table below).

-Until now, the Chinese consumers have been value driven – with household incomes between $6,000 and $16,000 they wanted good value for their money, with acceptable quality and were pragmatic rather than emotional buyers. However, mainstream consumers are shifting focus to discretionary items and can afford homes, cars and small luxury items, and they care about quality and experience rather than just price. It is expected that by 2020, mainstream consumers will total 400 million comprising 167 million households.

-Chinese consumers are also the world’s most underleveraged consumers, with less than 50% of homes purchased using leverage and household debt to income being less than 50% (despite increasing significantly recently) compared to 90 to 110% in the U.S. Additionally, female participation in the workforce in China is 76%, versus 33% in India and 58% in the U.S. Chinese women tend to be financially ambitious, have more money to spend before they marry and are usually the primary financial-decision makers after marriage.

-Lastly, the affluent Chinese consumer is very confident about their future ( confidence drives spending) and 70% believe that their income will rise significantly over the next 5 years versus less than 50% in the U.S.

-The authors end the book with a final macro story, which speaks to the magnitude of Chinese consumers and their increasing impact on the world: “ In May 2014, a group of Chinese tourists took a one-week organized trip to Los Angeles. They flew from China, stayed in hotels and traveled around seeing the sights in tour buses. What was interesting about this particular tour group was that it had over 7,000 people. They boarded 86 planes in China, occupied 26 hotels in Los Angeles and traveled around in 160 buses. They also apparently had some fun descending on various locations en masse. When was the last time you passed a caravan of 160 buses on the freeway?”

-A fascinating piece which illustrates that China is successfully managing its transition from an investment/export driven to a consumer led economy. While this will imply slower growth, the absolute scale of its economy will continue to have the largest impact on the global economy. While investment in infrastructure in recent years has been massive, the demand for this infrastructure is also likely to continue for another decade – as McKinsey note in a 2014 report- “ Urbanization is arguably the most important phenomenon shaping modern China. More than 300 million people have moved from the country to cities in the past 30 years, and an additional 350 million are on the way. China has 160 cities with populations of more than one million and 14 with more than five million. Increasingly, these cities are becoming linked, creating urban areas with 30 million people or more—the size of many European countries. Before long, there will be one billion city dwellers in China, placing intense demands on infrastructure such as transportation and public services.”

High-Fibre Foods Reduce Risk of Type 2 Diabetes:

The evidence in favour of a high fibre diet to prevent chronic diseases continues to mount, and in particular, disputes the flawed notion of minimizing whole grains (as part of a reduced carbohydrate diet) to achieve weight loss.

PRCM, May 30, 2015:

http://link.springer.com/article/10.1007/s00125-015-3585-9

-A high-fibre diet may reduce your risk for type 2 diabetes, according to a cohort study published in Diabetologia. Researchers monitored fibre intake from cereal, fruit, and vegetables for participants in the European Prospective Investigation into Cancer and Nutrition (EPIC)-InterAct study for about 11 years. Those who ate the most fibre (more than 26 grams per day) experienced an 18 percent reduction in diabetes risk compared to those who consumed the least (less than 19 grams per day). High fibre consumption also led to lower body weight. An additional meta-analysis of 18 studies showed a 9 percent decrease in risk for every 10 grams of fiber consumed. Overall, fibre from cereals contributed the highest risk reduction of up to 25 percent.

To help increase your fibre intake, try the fiber checklist.

Here’s to making sure we get enough whole grains in our daily diet!

Regards,

Aditya

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