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China Consumer Boom On The Way.
Credit Suisse reports today that China is on course to become the world's second-largest consumer market by 2015, but foreign firms looking to tap the retail boom must brace for a bumpy ride and possible price wars.
Overseas firms now produce far more in China than they sell there, but that is likely to change as the economy comes to rely more on consumption than exports and investment to stoke its sizzling growth.
Credit Suisse projects that the value of Chinese consumption will hit $8.8 trillion by 2020, fueled partly by a 5 percent yearly appreciation in the yuan between now and then.
That would take the Chinese currency to 3.9 to the dollar from 7.73 now.
By 2015, only the United States will be a bigger consumer market.
But devising winning strategies could prove tough amid shifting spending patterns, falling prices for some products and the fact that personal incomes are lagging economic growth.
"The potential of the market is huge," said Vincent Chan, the bank's head of China research. "However, the execution in the process could be tricky," Chen, who penned the report, told a news conference.
Foreign companies such as Coca-Cola Co. (NYSE:KO - news), Nestle (NESN.VX), Procter & Gamble (NYSE:PG - news) and, Swatch (UHR.VX) (UHRN.VX) appeared well-placed to ride the unfolding consumer boom, the report said.
Luxury retailers like LVMH (LVMH.PA), whose handbags are coveted by a small but growing group of super-rich, should benefit given their relatively low advertising overheads.
But companies seeking inroads into the mass market needed to adapt their products to local tastes and be prepared to slash prices to cope with fierce competition, Chan said.
Outsiders would probably find it harder to break into the services sector, where Chinese companies have the upper hand because of their cultural know-how, he said.
Credit Suisse's third China Consumer Survey, based on a 2006 survey of 2,700 respondents in 8 cities, sheds light on spending and saving trends in the world's most populous nation.
As in previous years, the survey concludes that households generally save or invest a quarter of their total income and spend almost the same proportion on food.
Consumers between the ages of 20 and 29, who enjoy the most buoyant income growth, tend to splash out more on clothes and entertainment, making them the prime target group for China-bound retailers.
Some of the country's consumer dynamics are shifting, the report finds: the appetite for electronic goods such as digital cameras and mobile phones is waning, while confidence in the quality of local cosmetics is growing.
As many as 75 percent of those surveyed indicated a reluctance to pay more for foreign cosmetics, up from 62 percent in 2005 and 50 percent in 2004.
More Chinese are traveling, with 52 percent of respondents saying they took a flight in 2006 compared with 48 percent in 2005. The survey found that Southeast Asia is losing popularity to Europe and East Asia as a holiday destination.
We recently blogged on China becoming a world economic power and hospitable venue for diamond and jewelry manufacturing.
Stay tuned.
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