High income households

Changing demographics will impact on China business plans for all companies

With China's overall economy expected to continue growing at around the current rate of 8 percent for years to come, the number of households considered 'high income' looks set to increase exponentially accompanied by a steady shift in spending patterns, according to a study by Asian Demographics.

High income households, as surveyed by the Hong Kong-based company, are currently divided into two levels – those with annual incomes of RMB 40,000 and those of RMB 80,000. Estimates of the future numbers of these households vary depending on how fast the economy grows and so predictions are based on two GDP growth rates: 6 percent and 8 percent per year.

The bourgeois revolution

Increasing population and smaller households in the cities means that by 2009 there will be more urban than rural households in China. Conservative estimates put the total number of all urban households at 207.7 million by 2012, primarily in the eastern coastal regions. With the government eager to make consumer spending the primary engine of the Chinese economy the number and distribution of these households have a direct implication on any company selling products or services with a higher price point.

Given the differences in outcomes to 2012 it is clear that the GDP assumption a company makes in its business plan is critical if they are looking at a payback period beyond 2007. It is not so critical if the payback period is to 2007.

The implications

The combined effects of increased number of households and expenditure per household means that even under the 6 percent average GDP growth scenario total expenditure of urban households earning RMB 40,000 and above will grow at 17.5 percent pa to 2012 and those earning RMB 80,000 and over will grow at 23.2 percent pa to 2012.

But the variability in outcomes is considerable. The total market (all expenditure of all households in segment) varies substantially under different growth scenarios.

The lesson is clear. Companies should be active in the market because of its absolute size and growth potential, but they must be careful because of the extreme variability in outcomes depending on how fast the economy grows.

Finally, it is important to keep things in perspective. For a household earning exactly RMB 40,000 pa it is estimated that in 2003 RMB 28,377, or 71 percent of yearly income, is spent. Of this, RMB 17,337, or 61 percent, is spent on food, clothing, household operations and residence, leaving RMB 11,040 for all other expenses.

For a theoretical household earning precisely RMB 80,000 it is estimated that in 2003 RMB 51,250, or 64 percent, will be spent. Of this, RMB 29,332, or 57 percent, is spent on food, clothing, household operations and residence, leaving RMB 21,918 for all other expenses during the year.

Clearly, for a product or service to be successful it should be priced so that it takes into account these levels of annual household expenditure.

The information in this article was provided by Asian Demographics.Visit their website at http://www.asiandemographics.com,