Getting ready for the next stage in China

Xiujun Lillian Li and Jonathan Woetzel/McKinsey & Company
13 Nov 2012

It’s been the next big thing for years -- and now it is actually happening. China is turning the corner toward becoming a consumption-led economy. By 2015 we estimate that private consumption will catch up to and then exceed public investment.

For consumer companies, the more pertinent figure is that in China income as a share of GDP is comparatively low – about 57%, compared to 63% for Russia. This will change; the government has signaled it is moving toward income promoting policies. To put that in concrete terms, we estimate that urban household spending, which was an average of 39,000 yuan in 2012 ($4,600, in 2005 prices) could rise to 112,000 ($17,700) in 2030.

The shift from country to city is still a work in progress in China; we expect urbanization to continue for another two decades, to reach 70 percent. In both economic and social terms, the most important thing to know is that urban households will be dominated by middle-income-plus families – 87%, compared to 71% now and just 13% in 1995. That shift translates into another important trend – toward the emergence of a more service-driven economy.

And again, 2015 is the tipping point. That year, the Chinese economy will, for the first time, we believe, be split equally between services and industry. By 2030, services will lead 53% to 42%. China is also working to create a tighter social safety net; subsidies to such programs are expected to triple by 2015. One likely result is that the sky-high savings rate will begin to fall, as people feel a little more secure about their retirement prospects.

The implications for businesses are huge. Right now, China’s GDP is about $6 trillion; by 2020, we think it will be $11 trillion. That’s the equivalent of adding almost another two Germanys.

Higher income, lower savings and a broader prosperity add up to more purchasing power. To this end, consumer companies have an enormous, historically unprecedented, opportunity.

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