Author: Joseph Cafariello

China has long been known as a nation of savers. Cautious and prudent with their money, the Chinese have favoured storing their wealth in property and precious metals and simply letting it grow over time.

With so much saving and so little consumer spending, the Chinese economy is driven not internally but externally, with a heavy reliance on exports and foreign investments. China’s Premier Li Keqiang wants to change that.

The past few years of global recession have shown the Chinese just how unwise it is to be so dependant on other nations. China’s focus now is on turning its populace from a nation of savers to a nation of consumers in a bid to fuel economic growth from within.

This is quite the undertaking. Just how is Premier Li planning on accomplishing it? Are there ways you can benefit from the changes taking place in China?

Focus on Urbanization

As any marketing firm will tell you, volume matters. With over 1.35 billion people living within its borders – nearly a fifth of humanity – China can show the world what volume sales really mean.

The problem holding China back from being the largest consumer market in the world is that its people are spread out over large areas, with only half of its population (some 51%) living in urban centers. The more than 657 million Chinese living in rural regions are effectively out of the commercial loop. Imagine the impact on the nation’s internal economy if China’s rural population – numbering more than twice the entire population of the United States – could be integrated into the broader consumer marketplace.

To that end, Premier Li wants China to urbanize. He sees the rural population as a potentially “huge engine” that will drive growth internally without such a heavy reliance on foreign income, which has proven all too unreliable.

“Urbanization will usher in a huge amount of consumption and investment demand, increase job opportunities, create wealth for farmers, and bring benefits to the people,” Premier Li expressed his optimism over his urbanization plans unveiled in March.

HSBC Holdings Plc (NYSE: HBC) estimates a continuous wave of migration from farmlands to cities of some 10 million persons each year for the next 20 to 30 years – the entire population of the U.S. Even then, there would still remain a quarter of China’s population in rural zones, much closer to the average distribution among developed nations.

The Challenges

Such a monumental relocation of people would be challenging enough even for a fully developed nation, never mind one still under development.

First, there are the logistical challenges: ensuring there is sufficient housing and grocery outlets, plus utilities such as water, electricity, phone, sewage treatment, schools, hospitals, and transportation. Any players of SimCity get the drill.

Second, there are the financing challenges: who will pay for it all? Mao Daqing, executive vice president of China Vanke Co., one of the largest developers in China, puts the cost at some 100,000 yuan (roughly $16,341) per new migrant. Even large cities like Beijing, Mao estimates, would end up having to raise tax revenues by 25% over the urbanization period.

The rebuttal argument, however, is that these new migrants won’t be just squatters who take without giving back. A pick-up in consumerism will fuel the expansion of businesses, creating jobs and generating sales, which will contribute to the larger tax revenue base.

A third challenge, however, is not so easily remedied through simple accounting: social acceptance. As with most developing nations, there is often a wide gap between urban and rural folk, not just in wealth and education, but also in … how shall we put it … social norms. Habits, manners, etc. Remember the 1960s TV program the Beverly Hillbillies? That sort of thing.

In fact, the differences between the classes could threaten the Premier’s urbanization plan altogether, as he himself noted at an urbanization forum in Beijing last week:

“Nobody wants such a big group of migrants to be their neighbors and share their so-called civilized space. This is a conflict of interest,” Li explained. “We are facing rejection from the hearts of so many mayors and city elites who have enough ability to influence decision making.”

While local municipal authorities may attempt to push back the Premier’s urbanization plans, they will undoubtedly fail. The ruling party always gets its way.

Potential Investment Boom

But once the classes are brought together and learn to overcome their partialities toward each other, the potential boom to business will be phenomenal. HSBC counts the impact of all those new urban-dwelling consumers at over $16 billion in sales growth each year – not total annual sales, but annual growth of sales.

After the Premier delivered his address at last week’s urbanization forum, China’s main stock market index – the Shanghai Composite – rose 1.3% on the expectation of what Li’s program could mean for China’s economy.

The new city dwellers will replenish labor forces that will draw more businesses from abroad to set up shop in China, as well as expand the operations of those already there. And more working families means more consumer spending.

While investors wishing to benefit from China’s economic activity had in the past focused on Chinese exporters, now might be a good time to shift toward companies that cater to the needs of local Chinese consumers.

A number of U.S. companies already have a long established presence in mainland China, especially in fast food and retail, including: Yum Brands Inc (NYSE: YUM), the parent company of fast food giants KFC, Pizza Hut, and Taco Bell; McDonald’s (NYSE: MCD); Coca-Cola (NYSE: KO); and Walmart (NYSE: WAL), with “more than 390 units in over 150 cities in 21 provinces, autonomous regions and 4 municipalities,” the company proudly boasts.

Yet you shouldn’t ignore Chinese corporations, especially the automakers. Automobiles are one of the fastest growing segments of China’s internal economy, and this will continue to grow at an even faster pace as urbanization shifts millions of Chinese off of carts and into cars.

Sales of Chinese-made autos surpassed 10 million units in the first half of 2013 alone, a 12% increase over the previous year. The “Big Four” Chinese automakers are SAIC Motors (which operates two join ventures with Volkswagen and General Motors), Chang’an Motors, FAW Group, and Dongfeng Motor.

As the Chinese government slowly entices its citizenry to pry open their wallets and start consuming, China may yet dominate the world in more than just resource consumption but in general consumerism itself. With Premier Li fully committed to his urbanization plans, a whole new chapter is about to be added to the China story. (Source: Wealthdaily.com)

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