Chinese Cozy Up to E-Commerce

China Market Research Group's Shaun Rein says a new breed of younger, more affluent consumers will drive e-commerce on the mainland

by Shaun Rein

Many analysts argue that Chinese consumers are conservative spenders and not willing to buy on credit or engage in e-commerce. The numbers initially seem to support such arguments as China's household savings rate sits at 40% vs. less than 1% in the U.S. Credit-card penetration is low, with fewer than 50 million cards in circulation for an emerging middle class of 250 million.

While China's Internet users will hit more than 140 million by the middle of 2007 and will overtake the U.S. as the largest group within the next few years, critics believe that e-commerce will never take off here because, as a matter of culture, Chinese do not like it. But do these numbers and conclusions incorporate the seismic shifts in consumer habits in China that have been taking place in the last decade? The answer is a resounding no.

These skeptics fail to look at the changing demographics of China's consumers. Sales are now being led by a younger generation that is willing to buy on credit and shop online. In surveys and interviews that the China Market Research Group (CMR) conducted with Chinese youth between the ages of 18 and 28 in Shanghai, Beijing, and Guangzhou, more than 80% said they were willing to buy items online and over 70% said they would use a credit card if they could.

Baby-Boomer Optimism

The results indicate that old stereotypes of Chinese consumers stuffing yuan under their mattresses can no longer be attributed to the increasingly well-off middle-class Chinese youth segment. This bodes well for multinational companies that hope to tap into China's fever for Web 2.0 and e-commerce.

It is true that older generations of Chinese do save a lot—many have lost their pensions and are worried about paying skyrocketing medical costs. Most economists look at these age groups and argue that China's economy will have problems in the future if the government cannot jump-start consumer spending.

However, many of these economists have been far too simplistic in their analysis of the future of China's household savings rates in the coming decades. Consumption patterns are very different for Chinese born after 1978—China's baby boomers. They have experienced 30 years of economic growth and political stability similar to those born during the post-World War II years in the U.S.

Wearing the Wealth

Our surveys show that Chinese between the ages of 18 and 28 save very little or actually buy on credit because they are so optimistic about China's economy and their own earnings potential. Their salaries are regularly increasing 25% a year as the competition for even junior talent is fierce and they job-hop like mercenaries.

These young professionals want to show their status in the workplace and spend nearly all of their salary on items such as Nokia (NOK) mobile phones, Zara clothing, and Estée Lauder (EL) cosmetics. In focus groups we conducted in Beijing, we found that more than 70% of young women making between $500 and $2,000 a month expected to travel to Hong Kong and/or Thailand in the next three years.

Instead of running up bills on a MasterCard (MA) or American Express (AXP) the way consumers in the U.S. do, Chinese youth finance their lives of leisure by borrowing from their parents and grandparents. Having experienced the bitterness of the Communist-Nationalist Civil War and the Cultural Revolution, older Chinese are determined to see their children (almost always their only child) happy and want to live vicariously through them, and therefore shower them with money.

Credit-Card Culture

Chinese youth overwhelmingly want credit cards. To date there are fewer than 50 million credit cards in China compared with more than 1.1 billion debit cards. However, 2006 saw the addition of 15.6 million credit cards and 200 million debit cards, so more and more Chinese are adopting credit cards.