China Focus: Deeper pockets and digital trends to drive Chinese consumption

For foreign companies targeting the deep pockets of China's growing middle class, understanding demand and consumption habits will be critical.

The future of consumption in China is digital, consumer-driven and aided by safe and secure mobile payment systems, according to attendees of the three-day annual World Economic Forum, which ended Tuesday.

The Chinese consumer market is the second largest in the world. Over the next five years it will continue to drive global growth, adding the equivalent of another Germany or Japan to the global marketplace.

About three-quarters of Chinese consumers plan to maintain or increase their spending in 2016, down slightly from 81 percent in 2015, according to a recent survey by Boston Consulting Group (BCG).

While growth in the size of the Chinese consumer market will slow, the growth in value is projected to increase as the expanding upper-middle class demands higher-cost, higher-quality goods and services, according to Tomas Casas i Klett, Director of China Competence Center at the University of St. Gallen.

The two principal drivers of growth are increased disposable income and a willingness to spend more, led by the upper-middle class and affluent households, younger consumers, and those employed in high-paying services, the BCG survey pointed out.

China's young "millennials" are growing quickly in both numbers and income. Those aged 18 to 30 years old will likely make up more than one-third of the urban population by 2020. Their consumption is growing at 14 percent annually, twice the pace of those over 35.

Young Chinese are digitally savvy and globally aware. New trends will emerge as they become a consumer force.The young generation's share of total consumption is projected to increase from 45 percent to 53 percent by 2020.

"They are embracing new brands instead of the established ones. For example, they would prefer Tesla to BMW," said Connie M.Chan, partner at U.S. venture capital firm Andreessen Horowitz.

Chan also pointed out that digitalization is transforming Chinese consumer behavior. China has the world's largest online consumption market. Traditional brands that fail to embrace technology will be hurt.

Meanwhile, the sharing economy is gaining steam in China as trust grows due to verification and user review systems, better credit infrastructure and harsher punishments for dishonest behavior, according to Yao Jinbo, CEO at 58.com, a leading Chinese online classifieds market.

While burgeoning e-commerce has created challenges for traditional retailers, there are still opportunities, according to Yan Xuan, President of Greater China with market research firm Nielsen.

Yan pointed out that convenience and specialty products are emerging areas for Chinese consumers. Convenience stores in China had nearly double digit growth last year, with Shanghai residents making an average 15 trips per month.

A BCG report showed that infant and baby products, consumer electronics, and financial services remain the top three categories for Chinese consumers looking to upgrade in quality, while personal-care products and travel are moving up the list. Endit