How China Can Create the $67 Trillion Consumer Economy

If the government delivers on its promise to transform the economy by encouraging spending on the high street, China's consumer base has the potential to surge over the next decade
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Shoppers in the Sheung Shui district, Hong Kong, China.

Photographer: Billy H.C. Kwok/Bloomberg

 You've heard of Made in China. Get ready for Sold in China.

For decades, China has exported cheap goods to the rest of the world even while domestic consumption waned. Now, the country's shoppers could be set for a reboot.

If the government delivers on its promise to transform the economy by encouraging spending on the high street, China's consumer base has the potential to hit $67 trillion over the next decade, according to The Demand Institute, a  think tank jointly run by The Conference Board and Nielsen.

Global interest in Chinese shoppers is already high. Music doyenne Taylor Swift has teamed up with Inc., the second-largest e-commerce company in China, to sell a new fashion line designed specifically for Chinese shoppers. At the movies, ticket sales are surging, with first-half box office revenue this year rising to 20 billion yuan ($3.2 billion), compared with just 4 billion yuan in all of 2008.

The hard economic data are also showing a shift, albeit slowly. Consumption in China contributed 60 percent to gross domestic product growth in the first half, even as the country grew at its slowest in 25 years.

Part of the spending increase is down to a government led push to shift the economy away from debt fueled investment and more toward consumption. But that won't happen overnight: Consumption's share of the economy eased to 28 percent in 2011 from 76 percent in 1952, according to the Demand Institute.

Source: The Demand Institute/Penn World Table

"There are signs that the decline in consumption’s share of GDP may have abated, but it has certainly not yet been reversed," the report's lead authors Louise Keely and Brian Anderson said.

In its analysis, the Demand Institute modeled two scenarios, both based on GDP growth slowing from around 7 percent to 4 percent by 2019 where it would stay until 2025.

Under the first scenario -- which they figure is the most likely -- the consumption share of GDP would remain constant at about 28 percent between 2015 and 2025, with total spending reaching 330 trillion yuan or $53 trillion.

In the second case, where consumption reaches 46 percent of output by 2025, or annual spending rises 126 percent, consumption would balloon to 420 trillion yuan, or $67 trillion.

The analysis is based on the development of 167 countries between 1950 and 2011. Countries with similar underlying fundamentals to China saw consumption remain flat relative to GDP for some time after it stopped falling.

Source: The Demand Institute, Penn World Table

If China's shoppers do take off, it will be from a relatively low base. Using the latest available comparative data from 2011, consumption in China made up 28 percent of real GDP, according to the report. That compares with 76 percent in the U.S., 67 percent in Brazil, 60 percent in Japan, 59 percent in Germany, and 52 percent in India.

(An earlier version of this story was corrected the reflect the accurate value in dollars.)