A better life? The wants and worries of China's consumers is an Economist Intelligence Unit report, sponsored by Bayer. It examines the aspirations of Chinese consumers, both urban and rural, looking at material wants as well as larger life concerns.

One of the legacies of the 2008-2010 global financial crisis has been a new focus on the latent power of the Chinese consumer. As demand in the United States and Europe has waned, exports have weakened as an engine of China’s economic growth, and Beijing has turned its attention to stimulating domestic demand.  

In parallel with its Rmb4trn (US$590bn) stimulus package, the Chinese government began offering vouchers in 2009 for appliances, furniture and even cars to encourage consumers to open their wallets. In mid-2010, China ended export tax rebates for certain sectors and eased the renminbi’s peg to the US dollar – all part of a strategy to reduce reliance on exports and shift the focus to domestic consumption. Faced with persistently weak sales in traditional OECD markets, foreign investors and local businesses have continued to sharpen their focus on the Chinese consumer.

What will be the end result of all of these efforts? Will Chinese consumption live up to its promise? We believe that in order for Chinese consumption to be truly unleashed, consumers need to feel confident that life is getting better. If they are worried about the future, and about basic needs such as healthcare and education, they will be less likely to spend. To gauge their confidence—and consumption priorities—the Economist Intelligence Unit has surveyed Chinese consumers, both rural and urban. The surveys, conducted between December 2009 and March 2010, spoke to two very different groups of consumers.

We should note that our conversations with respondents coincided with a remarkable recovery in the Chinese economy, largely driven by the government’s massive investment programme. China’s GDP growth had slumped to 6.2% in the first quarter of 2009 (year-on-year), but had recovered to 10.7% growth by December 2009 when our survey was launched. The economy grew even more quickly in the first quarter of 2010, hitting 11.9%. The government’s role in successfully steering the Chinese economy through the hazards of the global financial crisis has been praised by many analysts, and has no doubt helped to maintain confidence within the country.

Our survey encompassed some (but by no means all) of the diversity within China. In one group are relatively well-off urbanites. In income terms, the sample falls in the top 13.5% of the population in cities.#1">[1] The other criteria for participation were home ownership, a white collar job—either managers at foreign-owned enterprises, government officials, managers at state-owned enterprises, private entrepreneurs or other professionals—and at least one-third of their income available for discretionary spending. With fairly secure finances, high education levels and few material wants, this group should be feeling very confident indeed.

In the other group, we have relatively low-income farming households#2">[2] (in contrast to their urban counterparts). The rural consumers we surveyed are farmers—rural residents who largely make their living selling agricultural products, not from working in a factory or on a construction site. To focus more fully on rural households, we looked at provinces where primary industry accounts for more than 10% of provincial GDP, thus comprising the more traditional economic backbone of the country. We selected an array of income levels as a proxy to the range of household incomes comprising the rural sector at the national level: 16% of our sample earns less than the equivalent of US$1,500 a year, 70% earns between US$1,500 and US$3,000 annually, and 14% earns more than $US3,000.

While relatively poor compared to the urban sample, the rural consumers who participated in our survey are no less important. They have been the focus of efforts by the government to reduce the gap between urban and rural living standards, and are also the target of stimulus programmes specifically aimed at encouraging more private consumption by rural households. In income terms, they are the rural consumers with the most potential for growth.

Among our main findings:

Optimism, even among the relatively poor farmers surveyed, is high. Across both of the survey samples, 91% of respondents said they are optimistic about the future. This confidence translates into expenditures: among the relatively well-off urban dwellers surveyed, only 17% said they were reluctant to spend money.

Everyone wants a car—but many are also worried about pollution. At 61%, car ownership among the relatively well-off urban consumers surveyed is much higher than the overall penetration rate for cars of 28 per 1,000 people in China. Not surprisingly, many more of our respondents plan to buy a car. At the same time, however, concern over air pollution is pronounced—54% cited it as the thing they would most like to change about the area in which they live, and 53% cited it as one of their greatest concerns about the future. Traffic is another area for complaint. China’s policies to encourage sales of hybrid and electric cars could not have come at a better time, but encouraging even well-off consumers to buy them may require more than subsidies. Looking at America’s experience, sales of so-called green cars have been driven more by personal and social preferences than subsidies or other incentives.

The passion for property will continue, and there is pent-up demand for quality housing. The relatively well-off urban survey respondents are playing a significant part in China’s booming property market—more than one-third already own two or more properties, and 61% plan to buy a new home in future. Many already live in newer homes—45% live in a house or flat that is less than five years old.

But new does not necessarily mean good quality. Asked what they would like to change about their living conditions, slightly more than two-thirds of respondents said they wanted to make their homes more comfortable by having such things as better temperature control. Given that 95% of respondents have air-conditioning and 81% use some sort of heat in winter, the comfort factor is likely to have more to do with efficiency ratings, either of the insulation standards of the buildings they live in, or the temperature-control systems and appliances used. Only 35% of the homes occupied by our respondents have insulation, and only 60% of respondents had heard of sustainable housing (described as “energy efficient housing with insulation in the walls and double-glazed windows and special materials to reduce noise”).

Healthcare is the number one concern of both the urban and rural consumers surveyed, but for different reasons. With the national healthcare reform programme still being rolled out, it is not surprising that health remains the biggest concern about the future among both urban and rural consumers. Indeed, among rural respondents, 84% cited health as their greatest concern for the future. Rural consumers were also the most worried about the cost of healthcare: 61% cited cost as the biggest healthcare issue facing their household, and less than half that number (26%) mentioned the quality of doctors and hospitals as a concern. Of the rural residents we surveyed, 22% did not see a doctor when they fell ill. Of those who did not see a doctor, 66% said it was because it was too expensive to do so.

Of the relatively well-off urban survey respondents, 60% said they were concerned or very concerned about health in the future. But their concerns were the opposite of those in the countryside—overall, 49% cited the quality of doctors and hospitals as their biggest health-related challenge, while only one-third said they were concerned about the cost of healthcare. In a separate question, 46% of urban respondents said they worry about their health. Why do they worry about their health? Job stress was the factor most frequently cited (by 31%), while pollution was the second most common.

To encourage rural consumption, more needs to be done to address basic concerns. The farming households surveyed showed a relatively weak inclination to consume—few were planning to upgrade the goods they already owned, or to make more expensive purchases in the near term. Even among the half of the survey sample that does not own a refrigerator, only 40% plan to buy one, and one-third of those see it as a purchase that is more than two years away. This suggests that more needs to be done to address their broader concerns about the future before programmes aimed at stimulating consumer demand can be more effective.

The biggest hope for these respondents is to see their children go to university—42% cited this as their greatest desire for the next ten years. The hopes being placed on the next generation can be seen in the fact that while only 20% of the rural respondents said they would like to move away from farming, and only 14% said their greatest wish for the next decade was to move to a city, a mere 5% expect their children to be farmers. Unlike the well-off urbanites in our survey, these farming households have even more at stake in seeing their children succeed—71% of respondents expect to live with their children when they grow old, and 72% plan to rely on them financially.

Use of the internet, believed to be a great economic leveler, is very low among the farming households surveyed, suggesting the risk of a widening digital divide. Only 10% of our rural respondents had an internet connection, and only 16% said they ever used the internet. This is somewhat lower than the rate reported in other surveys. According to data from China Internet Network Information Center#3">[3] (CNNIC), there were 107m rural internet users at the end of 2009—accounting for 28% of China’s total—but the rate of growth in rural users had slowed and the overall rural penetration rate was still around 15%, compared to 45% penetration in urban areas.#4">[4] Only 16% of our rural respondents owned a personal computer. The largest growth area in internet penetration in China is through mobile connection, which accounted for 61% of total internet users. But while 92% of our survey respondents own a mobile phone, only 9% said they used their mobile phones to get online. Affordability is undoubtedly one reason for poor take-up, but other studies suggest that lack of familiarity of how to use the internet and its utility are at least equally to blame.

Even the well-off remain big savers, and hesitant borrowers. In theory, wealthier consumers should be more confident and more willing to spend. Given the income bands we have targeted in our survey, respondents in Tier 3 and 4 cities should be very well off indeed based on the assumption that their incomes will go much further given the lower cost of living in their cities. But we found that their confidence does not seem to show a proportional gain: savings rates were actually higher in the lower tier cities. In Tier 1 cities, 67% of respondents said they saved more than one-quarter of their household income, and 32% said they saved more than 35%. In Tier 3 and 4 cities, the figures were even higher: 70% of respondents in Tier 3 and 69% in Tier 4 saved more than one-quarter of their household income, and the figures for those saving more than 35% were slightly higher.

The same story held true in terms of borrowing to finance property purchases. In Tier 1 cities, 75% of respondents said that they had relied on their own earnings or on family and friends to finance the purchase of the home where they lived. But in Tier 4 cities, that figure rose to 83%. This thinking appears to be deeply ingrained. Though 61% of urban respondents planned to buy a new home, they do not plan to borrow much to finance it. Respondents in Tier 1 cities seemed to be more willing than others to take on debt—47% said they would borrow between 30% and 50% of the price of their new home. In the other tiers, an average of 37% of respondents said they would borrow between 30% and 50% (though this could also reflect access to borrowing in the lower-tier cities).

[1] According to Economist Intelligence Unit and National Bureau of Statistics data. We spoke to consumers with household incomes between US$10,000 and US$100,000. Of this sample, 40% have incomes between approximately US$10,000 and $US20,000 and 26% earn between US$20,000 and $US30,000. Just under 2% earned slightly less than US$10,000, and 33% earned more than $US30,000. These incomes will go farther in some cities than others – US$10,000 goes farther in Changchun than in Shanghai. Our respondents set aside one-third of their income for discretionary spending.

[2] Because estimates of rural incomes in China vary widely, in designing the sample we used average adjusted income per head figures from the National Bureau of Statistics, adjusting them upwards slightly to account for somewhat higher estimates provided by private research groups.  

[3] CNNIC’s data is based on a survey of 72,000 consumers aged six and over.

[4] China Internet report.