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China Retail: A changing landscape - Part I: Fast fashion brand.
Tuesday, 31st December 2013
Source : CBRE China Research - Special Report

After thirty years of rapid economic growth, China has made tremendous achievements in social and economic development and the living standard of Chinese citizens has improved substantially during the same period of time.

These developments have opened up a lot of opportunities in the domestic consumption market, which has drawn enormous interest from retailers around the world.

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Since the turn of the century, China’s economic growth has notably been driven by investments (see Chart below). In contrast, the share of household consumption as a percentage of GDP (household consumption ratio) has been declining, from 46% in 2000 to 36% in 2012.

The RMB 4 trillion stimulus introduced in 2008/09 further elevated the country’s dependence on investment-driven growth. While the stimulus was effective in bringing China back to double-digit GDP growth in the near term, it has created serious issues including excessive liquidity, high inflation, mounting local government debts, redundant construction, and soaring asset prices.

In view of this, the new leadership of Mr. Xi and Li has repeatedly advocated the need to transform the current investment-driven economy to a domestic-consumption-led economy. This bodes well for the growth of the domestic consumption market, which we believe will continue to grow at a double-digit pace in the foreseeable future.
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Furthermore, both academic research and international experience have showed that domestic consumption will inevitably become the major and more sustainable economic growth driver as a country (including China) enters the later stages of industrialization.

Against the backdrop of weakening external demand and continuing appreciation of RMB, it is even more critical for China to further develop the domestic consumption market to sustain its economic growth.

In our view, Premier Li Keqiang’s “New Urbanization Program” and the government’s target to double household income by 2020 will significantly enhance household consumption and the propensity for consumers to spend.

Compared to other developed countries, the household consumption ratio in China is extremely low (see chart below), indicating significant room for growth in the coming decades.
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We believe the China retail market has enormous potential to be tapped in the years ahead. Yet challenges do exist at this crucial turning point for the retail industry.

For example, we identify competition from e-commerce, homogeneous product offerings, a lack of differentiation, and rising operating costs especially labor costs as primary challenges.

In the face of these, the retail industry will go through many changes in order to maximize the opportunities brought by the changing landscape in China’s retail industry.

1. Nominal growth.
2. Data with asterisk are of 2011 and the rest are of 2012.

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