China will surpass the US as the world’s biggest retail market by 2016 thanks to the country’s growing economy and rising household income, according to PricewaterhouseCoopers (PwC).
Global and domestic retailers will continue to bank on China to drive growth in the coming years, the firm said, estimating that retail sales in the country will reach $4.2 trillion by 2016 and that private consumption will make up around 40% of China’s economy.
Based on PwC’s forecast, the proportion of Chinese households earning more than $15,000 a year will increase from roughly 11% in 2011 to 41% in 2016.
China is currently the world’s second-biggest consumer market after the US, though domestic consumption has yet to be a substantial contributor to China’s economy. In 2012, private consumption represents roughly 36% of China’s gross domestic product, compared to 71% in the US.
Retail sales are forecast to grow at 10.9% to $2.3 trillion this year, and to average 10.5% from 2013 to 2016.
This growth will be driven by the central government. At the Communist Party’s 18th National Congress held in November, the country’s leadership said that it aims to double China’s GDP and the per capita income of both urban and rural households by 2020.
“Retailers operating in China are no longer just focusing on the bigger first- and second-tier cities,” said Carrie Yu, PwC’s retail and consumer head for China and Asia-Pacific. “They are now expanding in third- and fourth-tier cities as disposable incomes in these untapped markets increase.”
Demand for consumer durables and electronics is also growing, with 2012 growth forecast at 12.4% for electrical appliances and 9.5% for personal computers. Mobile phone subscriptions are estimated to grow at 11.7%.
During the past few decades, China’s economic growth has rested on three unequal pillars: investment, exports and domestic consumption. Massive levels of government investment have produced diminishing returns, particularly in infrastructure-related projects, while sluggish external demand has severely affected China’s exports.
Of the three pillars, domestic consumption has been the weakest, as workers’ salaries have been suppressed to maintain export competitiveness. The rising cost of education, housing, healthcare and pensions has forced people to prioritise saving over spending.
As for the Asia-Pacific region, PwC forecast that it will grow 5.8% in 2012 and 6% in 2013, with an upward trajectory expected for the industry until 2016, when the market is estimated to be worth $11.8 trillion.
Although Asia is affected by the global economy, it still holds out the best opportunity for growth and profits for retailers big and small, Yu noted.
