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China workers ‘to account for 12% of global consumption’
18 HOURS AGO by: Steve Johnson

Spending per head to more than double by 2030, says McKinsey, with education a top priority

China’s working-age population will account for 12 cents of every $1 spent worldwide in urban areas by 2030, reshaping the global economy much as the west’s baby-boomer generation did in its prime.


Their annual consumption will more than double, from $2.5tn in 2015 to $6.7tn in 2030, according to the McKinsey Global Institute, the research arm of the eponymous consultancy.


“This generation of consumers in China is more prosperous, more educated and more willing to spend a higher share of their income than previous generations were at the same age.


“These consumers are now reaching income thresholds at which spending on services takes off rapidly,” McKinsey GI said.


Despite China’s longstanding one-child policy, McKinsey forecasts that the number of Chinese people aged between 15 and 59 will rise from 521m to 628m by 2030.


However, the rising incomes of these workers will have a far greater impact, with the proportion of urban working-age households with monthly earnings of $2,100 or more tipped to rise from 4 per cent in 2010 to 54 per cent by 2030.


Driven by this, McKinsey sees the per capita consumption of urban working-age Chinese people rising at a compound annual growth rate of 5.4 per cent, raising spending per person from $4,800 to $10,700 by 2030.


Even if this transpired, per capita consumption would still be a fraction of western levels, with McKinsey forecasting that working-age people in North America will increase their consumption from $39,000 a head last year to $48,000 by 2030, with the over-60s in the developed world spending a fraction more still, some $49,000.


Nevertheless, the sheer size of this Chinese cohort, dwarfing the projected 191m working-age North Americans and 222m greying developed world types by 2030, will magnify their impact.


McKinsey predicted that working-age Chinese people will account for 18 per cent of global urban consumption growth by 2030, with their compatriots aged 60+ accounting for a further 10 per cent, as the first chart shows. (McKinsey does seem to be oddly obsessed with urban consumption, rather than consumption in general, but this does not matter too much as spending by those in areas it deems “urban” will account for 91 per cent of global spending growth in the period to 2030, it estimates).


To put this into perspective, Europe’s much-discussed millennials (defined as those born between 1985 and 2000) will account for less than 2 per cent of global consumption growth in the period to 2030, says Richard Dobbs, a director of the McKinsey GI, who believes “the glamorisation of youth by marketers and advertising buyers is a vestige of the past”.


The analysis, based in part on interviews with 10,000 Chinese people and a separate survey of 22,000 people spread across 25 countries, suggests the Chinese will start to shake off their reputation as risk-averse savers.


Those aged between 18 and 54 told McKinsey that, if their pay rose 10 per cent in the next 12 months, they would spend 43 per cent of this, above the 31-32 per cent in western Europe and Japan and 20 per cent in traditionally spendthrift North America, whose citizens say they would save 39 per cent and use 41 per cent to pay off debt.


As Chinese consumers begin to narrow the spending gap with their wealthier western peers, their pattern of consumption is also likely to change.


As the second chart shows, food accounts for almost half the spending of even middle-class Chinese workers. Just 11 per cent of consumption is directed towards dining out and recreation, and 7 per cent to housing and utilities.


In contrast, US workers (or at least 25-34 year-olds) spend almost half their money on housing and utilities and a further quarter on dining out and recreation. Just 13 per cent goes on food.


The over-60s in the developed world have a surprisingly similar spending mix to that of American millennials, admittedly with a little lower spending on housing and utilities and a little more on the category of education and healthcare.


As Chinese workers steadily become wealthier, it may seem logical to think their spending patterns will be reshaped to more readily replicate those in the developed world today.


This has not gone unnoticed in the west, with McDonald’s last week announcing plans to open 1,250 new outlets in China in the next five years, adding to the 2,000 it already has in the country.

One area where China is forging ahead of many of its western peers, however, is the importance it places on education. According to McKinsey, education accounts for half of the spending of the average Chinese 20-year-old, compared to less than a quarter in the US.


If the consultancy is correct, this differential could become larger still. In the period up to 2030, it expects spending on the education of the under-30s to account for 12.5 per cent of China’s overall consumption growth, just a fraction behind the 12.6 per cent it has pencilled in for Sweden, the country expected to prioritise education most of all.


As the final chart shows, most other major countries are expected to target education far less, from the likes of the US and Japan, which already spend four or five times as much per child as China, to Nigeria and India, which spend around one-seventh as much per child as China.


“One of the most striking consumption patterns is the very significant share of income that Chinese consumers are spending on education,” McKinsey said. “It is notable that both public and private education spend are rising, contributing to growth roughly equally.”