You have probably heard that “May you live in interesting times” is a popular saying in China. It isn’t. That is one minor illustration of the outside world’s unerring ability to misunderstand China. Another example is the global obsession with its GDP growth. In the ‘new normal’, as analysts call it, the country’s economy is expected to grow by 6% a year between now and 2020. Yet, as the travel writer Peter Hessler noted, three things are never in short supply in China: change, tea and statistics. And if brands and retailers look beyond its largest cities, they will discover one of the world’s fastest growing consumer markets: rural China.
What kind of growth are we talking about here? Statistics from BGTimes Beijing suggest that shoppers in China’s rural areas spent around US$28bn in 2014, a sum they expect to virtually double to US$55.6bn by the end of 2016. “The new normal of 6% growth a year is still good,” says Jessie Qian, KPMG in China’s Head of Consumer Markets, “but that growth will vary across China. You will see smaller growth on the coast and faster growth in rural China, particularly in areas where the average annual income is US$2,000 or more, with a city whose population is a million or more nearby.” (The country has 96 cities each with a population of one to two million.)
Whatever the headlines, half-truths and generalizations, China’s consumer economy is in good shape. Chinese consumers spent 10% more in the first half of 2015 than in the same period in 2014. As their disposable income rose by 8%, this means they are finally doing what the government has long wanted them to do – saving less and spending more. There is still a long way to go – consumption only accounts for 37% of GDP in China, compared to 60% in India and 70% in the US – but it’s a step in the right direction. Chinese consumers still have plenty to spend: JP Morgan estimates that they have more than US$9trn in the bank.
There is also a disconnect between perception and reality when it comes to rural China. The rise of the country’s megacities has obscured the fact that rural China is still home to 622 million people. In what you might call ‘trickle-across economics’, workers who have migrated to cities send around US$45bn a year home to relatives in the villages.
The unprecedented scale of this migration – an estimated 170 million workers return to their villages to celebrate New Year – could have unbalanced the country socially, financially and economically. Realizing this, China’s leaders have taken various steps – from improving infrastructure to giving farmers more freedom to manage their land and investing US$22bn to ensure that 98% of the countryside is connected to the internet by 2020 – to stimulate village economies. Poorer rural areas are benefitting from the government’s anti-poverty drive – the ambitious target is to eradicate it by 2020.
These initiatives are transforming China’s rural economy. A rural middle class has emerged, with disposable income and the confidence to spend it. The per capita income for farmers has reached US$6,000, a threshold that, in other parts of China, has seen consumer spending surge. By the end of 2014, there were 77 million rural online shoppers, 40% more than the year before. “Millions of people in rural areas are shopping on their smartphones,” says Li Fern Woo, Advisory Partner at KPMG in China. “And when they buy, they are likely to be influenced by social media, peer reviews and bloggers.”
China’s e-commerce giants are keen to seize the opportunity. JD.com is opening 500 shops in rural areas and striving to reach the farthest-flung areas with a network of 160 warehouses, 1,000 delivery stations and third-party alliances. In April 2015, Alibaba partnered with state-owned China Telecom to sell budget smartphones – some costing less than US$50 – in rural areas, with the shopping app for Alibaba pre-installed.
That is just one aspect of Alibaba’s audacious plan. It is investing US$1.6bn to build distribution hubs across the country and 100,000 drop-off locations in villages. At the heart of its strategy is the Taobao rural service center, where customers buy goods, pay mobile phone and utility bills, and collect items they have bought online from Taobao. The company provides computers and monitors, ensures timely delivery of purchases, and trains villagers to help run these centers, many of which are in convenience stores.
At first, Taobao sold such staple items as phones, washing machines, televisions, and apparel – but it could transform the rural economy in the long run. When it is confident that it has the talent and infrastructure in place, it plans to build a digital platform enabling farmers to sell their fruit and vegetables to the cities.
“In the past, the rural consumer has often been faced with limited choice of product and been offered low quality goods where price was the main attraction,” says Qian. “That is changing as consumers have more money, want to experience brands for the first time and look to buy products that improve the quality of their lives.” These shoppers still appreciate a bargain – the right price point is crucial – but are less willing to compromise on quality.
Reaching China’s flourishing but remote regions – and understanding the psychology of consumers in these communities – is far from straightforward. The government is easing restrictions on imports of foreign goods, but Unilever has decided to proceed with a local partner, Alibaba, using its distribution channels, Tmall B2C online marketplace and a unique QR code to verify the authenticity of its products.
There are three fundamental causes for optimism about China’s rural consumers. President Xi’s government has turned words into deeds: changing policies, passing laws and making investments. China’s rural population has more disposable income – and hasn’t had access to many products and brands before. And if China’s ‘new normal’ is 6% annual growth in GDP, it may give a society that has condensed two centuries of economic development into 25 years the chance to enjoy living in uninteresting times.