Forget big city lights and slick streets, China’s next consumption surge may have its roots in the rural sector.
In a country of 1.3 billion people, half live in villages. That’s 650 million rural Chinese consumers, and according to a report released by Nielsen on Thursday, China’s rural consumer market is a $500 billion opportunity that’s been largely untapped until now.
Dale Preston, senior vice president, Analytics and Consulting at Nielsen Greater China says the rural market has been overlooked because companies have so far largely focused on the middle class and top-tier cities.
But rising wages are changing China’s shopping landscape.
“We’re seeing that in rural areas, consumers’ lifestyles are improving. They are getting more money and they want to experience brands for the first time,” says Preston. “They have a real desire to improve their lives… these consumers are ready to buy.”
Ironically, inflation, which has worried investors and policy makers over the past year, has been the farmer’s friend. “One of the main drivers for China's rural consumption boom is the rise in food prices which has raised income among farmers,” says Frederic Neumann, Managing Director and Co-head of Asian Economics Global Research at HSBC
Higher prices have also been accompanied by a spate of handouts from the government that have put more money in the hands of China’s rural sector.
Francis Lun, Managing Director of Lyncean Holdings in Hong Kong says the government has spent money to boost agriculture, farmers and farmland and it’s also abolished many of the levies on farmers.
China’s latest Five-Year Plan, an important determinant of government largesse, also calls for rural development and urbanization. “The government started promoting health insurance system, medical care, education and housing system reforms, which aim to benefit the low-income families in the rural area,” says Shen Jian Guang, chief economist at Mizuho Securities.
The government’s helping hand has brought Chinese farmers closer to the $6,000 per-capita income mark, a crucial threshold watched by some analysts.
“Empirical evidence shows that all counties that have crossed the annual $6,000 per capita income mark will experience a surge in consumer spending,” says Chi Lo, CEO of HFT Investment Management. “A secular rise in Chinese consumption is certainly possible as annual average per capita income outside the large cities grows pass $6,000.”
In fact, Chi Lo says, consumption grows by an average 29 percent within 2 years after the $6,000 mark is hit.
Then there’s also the influx of city-earned money, given that one in five villagers work in China’s urban cities, according to Nielsen. The World Bank estimates these migrants send $45 billion dollars a year back to their villages.
But investors and companies looking to bet on the rural consumer will have to adjust to a different pattern of behavior.
For one, rural consumers shop less, but spend more. Nielsen’s latest survey shows rural shoppers make 20 percent less shopping trips than urban residents, but they spend one-third more each time.
There’s also a big gap between the amount that rural and urban shoppers spend, which according to Nielsen means rural consumption has a lot more growth ahead.
The firm says a rural shopper spends an average of 418 yuan ($66) a month, while an urban consumer spends 1199 yuan ($190).
“Rural residents are braking into China's fast growing consumer class,” says Neumann of HSBC. “Households in urban areas still enjoy far higher incomes, and are thus the primary target for international companies,...but the rural boom is starting to have an impact as well, even if the type of products demanded are different.”
Nielsen says China’s villagers are spending on value. They’re doling out the cash on new clothes, out of home entertainment and new technology products like digital gadgets and home appliances.
“As village consumers become more affluent, they seek out products with key features and benefits similar to those in urban centers,” says Preston.
Plus, poorer people are more likely to shell out the cash since they have a higher marginal propensity to consume (MPC), says Chi Lo of HFT.
“Typically poor people have higher MPC than rich people, who tend to save more out of each additional unit of income they earn.”