The 737 million consumers

Home delivery with Chinese characteristics

It’s not every country’s good fortune to suddenly discover it has an untapped market of 737 million consumers. Indeed, with the decline in Chinese exports to the 705 million consumers that populate the US and the EU, that’s a pretty handy group to have up your sleeve.

The Chinese government has realised as much, and has decided to unleash the purchasing power of the Chinese farmer. In a bold move to shift demand from exports to its rural residents, the government has launched the ‘home appliances to the countryside’ project.

The project is basically a subsidy scheme – the aim being to boost the buying of white goods in rural areas. The policy offers rural consumers a 13% rebate on purchases of TVs, washing machines, refrigerators, and mobile phones. The rebates began on February 1, and according to the China Business Times, industry insiders forecast that the policy will lead to the purchase of 480 million individual appliances over four years. In monetary terms that means sales of around Rmb920 billion ($134 billion).

Like all things in China, the law of big numbers quickly kicks in. Take washing machines. Around 46 in every 100 rural households owns one. If that proportion increases to 50, that equates to around 10 million extra machines. That is 50% of China’s annual washing machine production.

The potential is reckoned to be huge. Compared to urban households, their country cousins only have half the mobile phones and washing machines per household, and a quarter of the refrigerators. The proportion is slightly higher for colour televisions (two thirds). But that all adds up to a lot of pent-up demand.

Home appliance manufacturers view the policy as nothing short of a lifeline. In December, the government received requests from 155 producers to get accredited for the scheme, and approved 122.

One of China’s largest white goods makers, Haier has not wasted any time. It has already got its products into 10,000 rural outlets in 10 provinces (China has 22 provinces, and five autonomous regions). Skyworth, another big player, has launched its own campaign to ‘double the number of LCD televisions in the countryside’.

And it’s not just domestic brands. Samsung has also designed a stripped-down no-frills 32 inch LCD television especially for the rural market.

Spending power in the countryside doesn’t match that in cities, particularly the wealthier coastal metropolises. Indeed, while per capita rural incomes grew by 15% in 2008, the income gap with the cities remains a large one (see chart). In absolute terms the average city dweller in 2007 made Rmb9,646 more per year than the average person in the countryside – the largest income gap since China began its reforms in 1978.

The government is seeking to close that gap by boosting farmers’ incomes. In October it raised the prices farmers received for their wheat by 15.3%. Such increases – farmers benefited from two price hikes in 2008 – go directly into farmers’ pockets, and boost their spending power. That’s why China Mobile is now targeting the countryside for subscriber growth too.

Anecdotal evidence suggests that penny-conscious rural consumers have been waiting for the new measure to take effect and have delayed purchases accordingly. Demand could therefore surge in the coming weeks. This would be timely given the recent sag in exports.

The policy will stir some interest in Washington too. The rebate programme – which should boost domestic consumption – is just the type of policy that trade deficit hawks have been demanding. They would like to see China consume more and export less.

But whether it indicates an underlying change in China’s export philosophy or just a short term response to the global slowdown is unclear. Regardless, the rebates are a welcome attempt to stimulate domestic sales. For rural residents – like the man in the photograph – a consumer bonanza beckons.

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