Enough Income?

by Ken Rice
Who have more income than they feel they need?

Contact the principal investigators- Lisy Wang lisyw@8sages.com, Ken Rice (kenr@ljs.com) with your questions, comments or request for the updates on this topic.

China has a preponderance of consumers whose income is growing more rapidly than their propensity to spend. Marketers have an enormous opportunity to stimulate consumer spending in China, as they did in the USA following World War II.

China is so complex that it is useful to think of it in parts. “Consumerist China” – as we will call it – consists of roughly 300 million residents of China’s urban areas who have landline phones. These consumers represent nearly one-fourth of the total population and an estimated 40% to 45% of all consumer spending in the People’s Republic of China. The population of Consumerist China is comparable to the total USA population.

Our September/October 2006 survey of 1,814 consumers is drawn in roughly equal numbers from Consumerist China and the USA. In making comparisons between the surveys, keep in mind that Consumerist China is a segment of a national population, representing only one of every four Chinese.

PERCEPTION OF ABUNDANCE

The survey finds that consumers in the two nations differ in how they regard their income. Over three times as many Consumerist Chinese (45%) as USA consumers (14%) report having “more than enough money” coming in than they need to live comfortably and securely.

“Taking everything into account, do you feel that you have more or less or just enough money coming in to live comfortably and securely?” (September/October 2006)

Far from explaining this difference in perception, absolute income only magnifies the difference between the two countries. In absolute terms, the average annual household income of urban Chinese is just one-tenth as much as consumers have in the USA (about $6,000 in urban China compared to over $60,000 in the USA).

DOUBLE CHECK THE NUMBER, IT SEEMED TOO HIGH.

INCOME SURGING AHEAD OF SPENDING

Although Chinese Consumerists’ perception of abundance is partially explained by the low cost of living in China, a more significant reason is their rapid income growth. In 2006, per capita disposable income of urban Chinese rose 12%. It has risen by 10% or more in each of the past five years. Nearly all of the increase in urban Chinese income is real, not a result of inflation. During the past five years, the average annual inflation rate for urban China was about 1.2%. With income rising much faster than prices, the spending power of urban Chinese is skyrocketing.

Among Chinese Consumerists, perception of what constitutes “living comfortably and securely” has not changed as rapidly as real income. Consequently, Chinese Consumerists are spending a progressively smaller proportion of their income on consumer goods. From 1990 to 2000, the proportion of income that urban Chinese spent declined from .84 to .79; since then, it has dropped more rapidly, falling to .72 in 2003 and .71 in 2004.

Source: National Bureau of Statistics of China

The current surplus of unspent income in China is reminiscent of the USA during and after World War II. During the war, USA consumer income outstripped propensity to spend and consumer consumption expenditures declined to 72% of dollar income. After the war ended, Consumer expenditures as a percent of income soared to almost prewar level of 87%. America’s advertising media and services grew exponentially as manufacturers spent heavily on marketing to generate demand for the flood of products and services they were able to produce. These efforts helped to launch a lengthy economic boom.

Source: U.S. Census Bureau

CONSUMERS WITH “MORE THAN ENOUGH” INCOME

Chinese Consumerists are poised for an economic boom if advertisers and marketers can encourage them to spend more of their rising income. Understanding what it means to Consumerist Chinese to have “more than enough” income helps to clarify the challenges of reaching this target market.

With one of the highest savings rates in the world, the inclination of Chinese consumers to save money is widely known. More Chinese Consumerists report having saved money in the past month than USA consumers (64% vs. 46%). Chinese Consumerists who feel they have more than enough income are more likely to save than the others (78% vs. 53%). However, Chinese Consumerists who feel they have more than enough income are not more likely to save than their USA counterparts.

Among consumers who feel they have more than enough income, those in the USA are more ready to make a major purchase than those in China. Specifically, 62% of these USA consumers feel now is a good time to make a major purchase, compared to 43% of Chinese Consumerists.

In China, consumers with “more than enough” income are less likely to be spending freely for day-to-day needs than in the USA. For example, 22% say they are cutting back on their standard of living in China, compared to just 3% in the USA.

One reason for Consumerist Chinese to hold back on spending is the way they perceive their financial security. Compared to USA consumers who feel that their income is “more than enough,” those in China are twice as likely to report that a family member was laid off in the past year (18% vs. 8%) and that they “could not get along” if their primary wage earner were unemployed (34% vs. 15%).

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