China’s rural areas key for future chemical demand

Chemical companies, Consumer demand, Economic growth, Financial Events, Oil markets

China incomes.pngIn the last of its Budget Outlook analysis, the blog today looks at the major changes underway in China. These are typical of many emerging economies, including India, and could potentially have a big impact on chemical demand.

The key issue is that China’s leadership has recognised the current export-driven development model no longer works. As Yi Gang, deputy central bank governor noted in July:

“China’s future economic growth will definitely gradually slow down. The issue for China’s economy is the quality of growth, which is why we now have to carry out structural adjustment and transform our development model.”

China’s export-driven development model meant investment in factories and urban infrastructure ‘crowded out’ personal spending. Over the past decade, it has grown at up to 30% a year, twice that of retail sales. Thus personal consumption is now only 30% of GDP, compared to 70% in the USA.

This has also led chemical companies to focus sales within China on the relatively well-off. But even in 2015, only 6% of China’s forecast 280 million households will have incomes of >$12.5k. The real mass-market will be the 73% of households with projected incomes of <$5.2k.

This market will include most of the rural population, who have been left behind over the past decade. As the chart shows, their disposable incomes today at $672/capita (red column) are only 1/3rd of those in urban areas (blue). The needs, and aspirations, of these 700m people will provide the major growth area for consumer spending.

The magnitude of this change highlights a further aspect of the uncertainty underlying the Budget Outlook this year. We do not know whether we will see global co-operation on currencies, or a collapse into protectionism. Nor do we know exactly how far, and how quickly, changing consumer trends in the USA, Europe and China will impact chemical demand.

This is why the blog believes that Scenario planning is essential this year. It is also convinced that the rewards over the next few years, for those who do it well, could be very good indeed.

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