The mak­ing of China’s con­sumer so­ci­ety

China Daily (USA) - - ACROSS AMERICAS -

China’s trans­for­ma­tion from a man­u­fac­tur­ing-driven and ex­port-led econ­omy to one un­der­pinned by ser­vices and do­mes­tic con­sump­tion is firmly un­der­way. And that’s good news not just for China, but also for the fu­ture of the global econ­omy.

The 2016-17 edi­tion of the Blue Book of China’s Com­mer­cial Sec­tor by Fung Busi­ness In­tel­li­gence and the Chi­nese Academy of So­cial Sciences maps the change. China’s re­tail mar­kets reached 30 tril­lion yuan ($4.6 tril­lion) in 2015, af­ter more than a decade of dou­ble-digit growth. Household con­sump­tion has be­gun to climb, even as the pace of in­vest­ment has fallen, and now ex­ceeds 6 per­cent of GDP. Though the con­sump­tion growth rate has slowed to 10.7 per­cent, the Blue Book projects that China’s do­mes­tic mar­ket may reach 50 tril­lion yuan by 2020.

A key driver of this trans­for­ma­tion has been in­ter­net tech­nol­ogy. Build­ing on heavy in­vest­ments in pub­lic in­fra­struc­ture, such as ports, air­ports, roads, rail­ways, and telecom­mu­ni­ca­tions, the in­ter­net is now ex­pand­ing rapidly the range of choices avail­able to Chi­nese con­sumers, while low­er­ing costs and ac­cel­er­at­ing de­liv­ery.

As a re­sult, China’s on­line re­tail sales have surged in re­cent years, from 6.3 per­cent of to­tal re­tail sales in 2012 to 12.9 per­cent by 2015. By 2020, 40 per­cent of all re­tail trans­ac­tions in China may be con­ducted on­line. On­line sales via mo­bile phones have jumped from only 1.5 per­cent in 2011 to 55.5 per­cent in 2015, and may reach 73.8 per­cent by 2018.

China has now over­taken the United States to build the world’s largest on­line re­tail mar­ket. With a growth rate of some 33 per­cent, it is also the fastest-grow­ing such mar­ket. And de­spite growth in in­ter­net use— the num­ber of con­nected Chi­nese has risen from 253 mil­lion in 2008 to 688 mil­lion last year— there is plenty of room for fur­ther ex­pan­sion.

This progress re­flects in­no­va­tions that en­able broad­based con­sump­tion with­out the con­struc­tion and main­te­nance of ex­pen­sive brickand-mor­tar out­lets. In fact, growth in mo­bile sales has been driven by lower-in­come con­sumers, par­tic­u­larly in ru­ral ar­eas, where more than 81 per­cent of in­ter­net use oc­curs via mo­bile de­vices.

One key in­no­va­tion has been multi-sided plat­forms like Alibaba, which, by pro­vid­ing ac­cess to pro­duc­tion, lo­gis­tics, distri­bu­tion, and pay­ments, chal­lenge tra­di­tional busi­ness mod­els – with con­sid­er­able suc­cess. In the sec­ond quar­ter of 2016, Alibaba an­nounced that its rev­enue from China’s re­tail mar­ket had in­creased by 49 per­cent year-on-year; an­other on­line plat­form, Ten­cent, re­ported a 52 per­cent in­crease.

By connecting small and medi­um­sized en­ter­prises (which ac­count for 80 per­cent of em­ploy­ment in China) with the con­sumer base, such plat­forms erode some of the com­pet­i­tive ad­van­tage of large State-owned en­ter­prises. In­deed, while the re­turns from China’s in­ter­net re­tail­ing revo­lu­tion have been highly con­cen­trated, for once this con­cen­tra­tion has not been in the State sec­tor.

In on­line re­tail­ing via mo­bile de­vices, Alibaba held an 84.2 per­cent share of the mar­ket last year, with the next largest on­line re­tailer, JD.com, cap­tur­ing just 5.7 per­cent. In the busi­ness-to-con­sumer mar­ket, Alibaba’s Tmall claimed a 58 per­cent mar­ket share in the third quar­ter of 2015, with JD.com tak­ing just 22.9 per­cent. In third-party on­line pay­ment ser­vices, Ali­pay held 47.5 per­cent of the mar­ket, while Ten­pay cap­tured 20 per­cent, andUnionPay, the only ser­vice de­vel­oped by the bank­ing

com­mu­nity, had 10.9 per­cent.

As a re­sult, SOEs, which have long spe­cial­ized in sin­gle mar­kets or prod­ucts, have now be­gun to rec­og­nize that they need to re­tool to com­pete both in China and in global mar­kets. Given that SOE re­form has long been on China’s agenda, this ex­tra im­pe­tus may prove ben­e­fi­cial. But the chal­lenge of de­ter­min­ing how to cre­ate a level play­ing field for healthy com­pe­ti­tion and im­prove cap­i­tal al­lo­ca­tion in the In­ter­net Era re­mains. It is not just China’s large com­pa­nies that need to re­think their busi­ness mod­els. As China’s e-com­merce plat­forms be­come in­creas­ingly global, they­may erode the dom­i­nance of gi­ant multi­na­tion­als in in­ter­na­tional trade. Al­ready in 2015, China’s cross­bor­der e-com­merce amounted to an es­ti­mated 5.2 tril­lion yuan, or 17.6 per­cent of the coun­try’s to­tal trade; it­may reach 8 tril­lion yuan, or 23 per­cent of to­tal trade, by next year. All of this growth is great news for China; in­deed, at a time of slow­ing per­for­mance in many tra­di­tional sec­tors, on­line re­tail­ing could be an eco­nomic life­saver. But it also rep­re­sents a ma­jor chal­lenge for a gov­ern­ment that has long re­lied on top-down de­ci­sion-mak­ing. China’s e-com­merce revo­lu­tion en­ables the coun­try’s con­sumers to de­cide where to put their money. They can choose not only what kinds of goods and ser­vices they deem worth­while, but also where to live and re­ceive an ed­u­ca­tion. As a re­sult, they have be­come a key driver be­hind the trans­for­ma­tion of the hous­ing mar­ket, sup­ply chains, fi­nance, and even mon­e­tary pol­icy. The task for China’s lead­ers is to re­spond more ef­fec­tively to their cit­i­zens’ needs and de­sires, in­clud­ing by ac­cel­er­at­ing progress on eco­nomic re­form. Specif­i­cally, they must phase out ob­so­lete sup­ply chains sad­dled with over­ca­pac­ity, bad debts, and fall­ing em­ploy­ment, while tax­ing the win­ners in the e-com­merce game. These im­per­a­tives are chal­leng­ing tra­di­tional ap­proaches to mon­e­tary, fis­cal, in­dus­trial, en­vi­ron­men­tal, and so­cial poli­cies, while test­ing the ca­pac­ity of the bu­reau­cracy and po­lit­i­cal sys­tem.

China’s trans­for­ma­tion into a con­sumer so­ci­ety will have pro­found im­pli­ca­tions for do­mes­tic and global sup­pli­ers and dis­trib­u­tors of goods and ser­vices.

At first, it might hurt some of China’s trad­ing part­ners, par­tic­u­larly the emerg­ing economies that have long de­pended on Chi­nese de­mand for their com­mod­ity ex­ports. The de­cline in Chi­nese im­ports has al­ready con­trib­uted to a de­cline in com­mod­ity prices. More­over, for­eign im­porters may find that Chi­nese-man­u­fac­tured con­sumer goods now cater more to lo­cal tastes and pref­er­ences.

What­ever chal­lenges emerge, the fact is that a pros­per­ous China, un­der­pinned by lo­cal con­sumers, will con­trib­ute to— and shape— a pros­per­ous global econ­omy. We can thank e-com­merce for that. An­drew Sheng is a dis­tin­guished fel­low of the Asia Global In­sti­tute at theUniver­sity of Hong Kong and a mem­ber of the UNEP Ad­vi­sory Coun­cil on Sus­tain­able Fi­nance. Xiao Geng, di­rec­tor of the IFF In­sti­tute, is a pro­fes­sor at theUniver­sity ofHong Kong and a fel­low at its Asia Global In­stiLUO tute. Project Syn­di­cate

JIE / CHINA DAILY

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