Rich Chinese keep spending while others cut back: McKinsey study
Pictured here is a science fiction-themed installation at Maison Hermes in Shanghai, China on November 28, 2022.
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BEIJING – Wealthy Chinese were more likely to spend this year, while poorer ones are cutting back on spending even more, McKinsey and Company found in a study published Thursday.
The discrepancy contrasts with 2019, before the pandemic, when “there was little differentiation in spending between the two groups,” the McKinsey analysts said. They noted that an official measure of consumer sentiment in China fell this year to an all-time low.
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Lockdowns and travel restrictions to control Covid outbreaks in China became more widespread this year as the more contagious Omicron variant entered the country. A decline in the real estate market also dragged down the economy.
However, more than a quarter – or 26% – of people with an annual household income above 345,000 yuan ($49,286) said they increased spending by 5% or more from last year, the survey showed.
Only 14% of this income group said they significantly reduced their spending.
The more affluent group continues to spend, while low-income groups are more hesitant and hold spending decisions
The trend reversed for those with much lower incomes, below 85,000 yuan a year. Only 12% said they increased spending, while 27% cut back, the report said.
“The wealthier population is more confident about their personal wealth and future prospects,” McKinsey told CNBC in a statement. “They remain relatively more confident in staying employed in the future and anticipating wage increases in the future. They also typically already have higher savings.”
“So, the more affluent group continues to spend, while low-income groups are more hesitant and hold spending decisions.”
Across all income categories, the majority — or about 60% — reported no change in spending this year. The proportion of the wealthiest who said they were spending more was also ten percentage points less than the 36% reported in 2019.
McKinsey’s survey of more than 6,700 Chinese consumers was conducted in July.
In the months since, national data on retail sales has fallen as Covid controls were tightened in major cities such as Beijing and Guangzhou.
The share of urban households wanting to save “for a rainy day” rose to 58% – the highest since 2014, the McKinsey survey found.
In addition to reporting higher savings, more than half of respondents still expected their household income to increase significantly over the next five years. However, the stock ticked lower to 54% this year from 59% in 2019.
More households become richer
Looking ahead, McKinsey expects the number of urban households in the lower income bracket to decline over the next three years, while millions more will enter a more affluent bracket.
The analysts noted that a separate survey in August showed that Chinese respondents had far stronger expectations of a post-pandemic economic recovery than consumers in the United States, Britain or South Korea.
Only India and Indonesia had a higher share of optimistic consumers than China, the report said.
“Higher incomes reduce their purchase frequency or change their preferences in certain categories rather than switching to cheaper brands or products,” the analysts said.
“This is facilitated by brands, especially domestic ones, stepping up their game and offering more broadly differentiated products.”
Watch more videos
Chinese consumers are increasingly turning to local brands and live streaming platforms.
Chinese consumers surveyed in August said they spent an average of nearly two hours a day watching content on short video platforms such as Douyin, the report said.
“The transition that’s happened over the last 18 months is from an engagement channel to really a commerce channel,” said Daniel Zipser, senior partner at McKinsey and head of the Asia consumer and retail practice.
“To be successful in social commerce, it’s not just about having a great streamer, also a great product, [but] to have the content to bring it to life,” he said. While local companies can often quickly adapt to new consumer trends, foreign brands and foreign companies always struggle, given the internal approval processes, to be as quick.”