More volatile, consumption-driven China economy prime for domestic product launch

Published on
April 22, 2014

Numerous processors and brand owners have been passing through Beijing and Shanghai the past few months with shared goals and concerns. Having long done their processing here they’re increasingly keen to launch processed seafood products geared for the domestic Chinese market. But many of these executives, in chatting with SeafoodSource, are also concerned about the impact of an apparent slowdown in the Chinese economy on local consuming power.

What looks like a slowdown however may also just be China’s becoming a more “normal” economy. Take the red herring about consumption. So many Westerners ask “why doesn’t China buy stuff?” Well, they do. Spend a day walking and sitting in malls of Beijing/Chongqing/Dalian and you’ll see a nation of obsessive consumers. This is an officially atheist state where consumption of food, consumer goods and luxuries has replaced formal religion.

A lot of economists and consultants like to point to the GDP/consumption ratio as proof that China isn’t consuming like the U.S., where GDP growth is overwhelmingly driven by consumption. But consider that fixed investment in China has been growing at a frenetic pace in China, at a pace far too fast for consumption to catch up. The fixed asset investment growth for the first two months of this year came in at a new low — but was still 19.7 percent.

Those still doubting the potency of consumption in China should look at the growth in catering and retail sales, both of them far outstripping anything in the region or the west. Retail sales in the first quarter of 2014 grew 12.2 percent year on year, compared to 11.8 percent in January-February. Real retail growth has been exceeding 10 percent for a decade, far in excess of rates in western and advanced Asian economies.

Western observers have to realize that as China shifts to a more market economy — in line, coincidentally, with a lot of advice, business conditions in the country will become more volatile. Interest rate liberalization means banks will be able to charge more for loans, adding to the financing costs of corporations. That’s already happening. And China will start to let companies default on their debt — something local provincial government were previously loath to do, for fear of eroding employment or public confidence in their rule.

Doubters like to point to slower GDP growth rates. The 7.4 percent GDP growth rate reported for the first quarter of this year is slower than 10 percent per year of a decade ago. But that’s the norm that has been embraced by China’s government. It’s the figure required to deliver enough growth in employment (arguably a more important figure than GDP growth with current policymakers).

One impressive figure was the contribution of the services sector to the latest economic figures: services, usually a higher-end source of economic activity, delivered 49 percent of China’s GDP growth in the first quarter of 2014, thus outstripping manufacturing (45 percent) as a source of GDP growth. Average incomes meanwhile will continue to grow. Minimum wages will go up 15 percent in most major cities this year. Retail sales are expected to climb 14 percent in 2014.

All told then, China’s data points to a continuation of the China’s consumption-driven growth story. But China’s also set to become a more normal — and volatile — economy. All in all, it’s a good time to launch products for the domestic market.

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