China No Longer Expected to be World’s Largest Retail Market in 2019

Jun 25, 2019
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A trade war that is crippling an already slowing economy means that China will no longer take the place of world’s largest retail market this year, with the United States now forecasted to remain in this position until 2021, according to research firm eMarketer.

eMarketer says retail sales in China will grow by 3.5% in 2019 to reach $5.291 trillion. This is a revision from the research group’s previous forecast that said China’s retail market would be growing 7.5% to $5.636 trillion this year. For the US, the research firm says retail sales will grow in-country by 3.0% this year (compared to the 3.2% projected in Q1), amounting to $5.475 trillion.

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According to the firm’s data, while retail and auto sectors have slowed, some parts of the economy such as manufacturing and construction still show growth. However, manufacturing and construction would be the big beneficiaries of stimulus spending, so this growth isn't likely to be sustainable.

Why is the China Retail Market Slowing?

The health of China’s retail market is a proxy for the health of the economy as a whole. While the trade war has made the expected decline of the economy even worse, the writing on the wall was there as early as 2012.

2012 was the year that China stopped receiving the dividends of demography -- a growing workforce as a fresh supply of young people migrated away from their agrarian homes into the cities looking for work. This kept wages low and firms productive. But come 2012, the working-age population began to shrink, the inevitable result of the one-child policy, and thus put pressure on firms to raise wages.

Fast forward a few years, and China began to lose its crown as the factory of the world given its rising wages. By the mid-2010s wages in China were accelerating rapidly: According to China’s National Bureau of Statistics, China’s average wage increased by 8.2% annually between 2008 – 2017 compared to a global rate of 1.8% for the same time period. Foxconn (TPE:2354) was already looking to expand production in Vietnam in 2007, tariffs and the trade war simply accelerated it.

Generation Z is China’s Retail Market Stimulus

It isn’t entirely doom and gloom in China. While the economy and retail market as a whole continues to decline, there are, in contrast, parts of the market that show healthy signs of growth. China’s Generation Z, those born after 1998, consume at a rate that far surpasses their peers in the West.

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According to a report by OC&C Strategy Consultants, which surveyed 15,500 people born after 1998 across nine countries, Chinese born 1998 or later account for 15% of household spending, compared to just 4% in the US. Although the vast majority do not yet have a career, being the only child with grandparents on either side, and a culture of giving cash as gifts, has its perks. OC&C’s survey said China’s Generation Z spent on average $7200 on luxury goods last year.

But eventually, this cash -- which is no doubt saving China’s retail market from a steeper decline -- will run dry. After all, this generation, by its own admission, only consumes capital and does not produce it.

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