China Consumer Spending On Services Is On The Rise

Barely a day goes by without calls from economists and policymakers around the world for China to increase its consumer spending. Consumer spending as a percentage of GDP is less than 50%, far below its approximately two-thirds share in the United States. The reasoning implies that current spending levels are limiting business opportunities for companies in China.

Yet even at today’s levels, there is still plenty of room for both local and foreign companies to expand business with Chinese consumers as long as they are looking in the right segment, according to China-based, long-time business scholar John Quelch. That increasingly means businesses should look to consumer outlays on services rather than finished goods, said Quelch, currently the executive vice chancellor at Duke Kunshan University in China, as well as a former dean of the London Business School, China Europe International Business School and Miami Herbert Business School.

“Culture and heritage, media, entertainment and sports events — all of these service-based experiences as well as travel — are being encouraged by the government and are actually delivering to the consumer,” Quelch said in a telephone interview from Shanghai.

“Tremendous opportunities are here for Western companies” looking into service areas, he said. “Of course the China government is going to be very interested in the content of what is being presented and put on. But in every country these days, that has to be navigated.”

Times have changed greatly in China since its early reform era when the country was mostly agrarian. Some 67% of the population live in urban areas, compared to under a fifth in 1980, according to Statista data. “Most Chinese live, of course, in relatively small apartments compared to United States consumers largely living in single family residences. And as a result, there is simply not the space in Chinese living areas for multiple television sets and a whole range of large, expensive appliances and other household goods. And therefore, consumption for home applications is relatively limited simply by the average size of living spaces,” Quelch said.

China’s Commerce Minister Wang Tao in an article in the publication Qiushi in July noted that the country’s growth of 6.2% in sales of retail services in 2024 exceeded the increase in sales of retail goods by three percentage points. “International trends suggest that when per capita GDP reaches approximately $15,000, countries generally undergo an accelerated transition from goods-based to services-driven consumption. With China’s per capita GDP surpassing $13,000, we are now entering a phase of rapid service consumption growth.”

One promising growth area cited by Quelch: travel. “I travel in China almost every weekend and I am relentlessly the oldest person on every flight that I take. And the vast majority of people on weekend plane flights, from my observation, are under 30 years old. And they’re typically traveling to another city in China either to reconnect with friends or relatives, or alternatively to visit museums, landmarks, scenic spots or concerts,” he said. (See related post here.)

“We do see young people in China gravitating their consumption towards more emotion-generating experiences, as opposed to putting their funds into material goods expenditures,” Quelch said. “Much of that consumption is in the service sector as opposed to the produced goods sector.”

Foreign firms and organizations attentive to changing times have been benefitting. In sports, for instance, the National Basketball Association, or NBA, in October held two exhibition games involving the Brooklyn Nets and the Phoenix Suns in Macau that were sold out at expensive ticket prices, Quelch noted.

Orchestra events have also been doing well. “We are seeing many, many orchestras coming from Europe more than from the United States, but Germany in particular is sending its best orchestras to generate soft power and goodwill in China,” he said.

“When I visit the Shanghai Symphony Orchestra periodically for a Friday or a Saturday evening concert, again, 80% of the concert goers are young people under 30. If I went to exactly the same concert in the United States or Europe, 80% of the people would be over 60 and half of them would be asleep within 20 minutes,” he chuckled.

“In addition,” Quelch continued, “there are also opportunities for museums and important galleries. The Musee d’Orsay of Paris just had a phenomenally successful exhibition in Shanghai. There is a great deal of receptivity and interest on the part of Chinese in Western European culture.”

For a younger crowd, Merlin Entertainments of the United Kingdom has been able to build an audience with the July opening of a new Legoland Shanghai Resort in Shanghai, Quelch added. Meanwhile, Shanghai Disney Report – the most visited theme park in China – this month unveiled plans for a fourth themed hotel.

To be sure, Chinese consumers still buy factory-produced goods – witness the recent boom in Labubu dolls. Also, savings rates in China that limit consumer spending will continue to run relatively high because social safety nets aren’t well-established, Quelch said.

In addition, the country is grappling with “whether or not the Western model of economic development that places significant emphasis on consumption as percentage of GDP is really an appropriate model to follow in a more resource-constrained 21^st century than it was in the 20th century when emphasis was not placed on environmental sustainability,” Quelch said.

“That is why I always make the point that there is good consumption, there is high-quality consumption, and there is low quality consumption. And high-quality consumption is consumption that, relatively speaking, does not aggravate the carbon footprint,” he said. Trade and geopolitical friction that may influence consumers also isn’t likely to be going away soon.

Ultimately, however, “as China transitions from an infrastructure investment led economy to the next phase of development, a higher percentage of GDP needs to come from consumption,” Quelch said.

Along the way, increase consumer spending on services “offers a great opportunity for Western companies,” he said.

That’s a different message and emphasis than is often heard in many quarters globally.

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