OREANDA-NEWS. April 17, 2014. A new generation of young, prosperous and independent consumers should drive spending in China over the coming years. China’s economy is still dependent on investment for growth. Consumption accounted for only 50 per cent of GDP last year, which was significantly less than the US and India.

But China’s large population and strong economic growth will make it the world’s powerhouse of middle-class consumerism over the next two decades.

Beijing, Shanghai, Guangzhou and Shenzhen are some of the richest cities in the eastern region, which has the most developed service industry, the highest wages and a growing tourism industry. These cities have experienced growth of the middle class. Retail consumption in Guangzhou has contributed more to GDP than fixed asset investment, such as infrastructure or machinery, for the past 12 years.

Less developed inland provinces are catching up and have grown faster than these rich coastal regions since 2007 and now account for 49 per cent of total GDP. Middle-class growth rates are expected to be much greater in smaller cities in the north and west as they catch up.

Consumption in China is expected to account for 60 per cent of GDP by 2020, according to the International Data Corporation. This is the equivalent of adding just under USD1 trillion of consumer spending at today’s levels. Urbanisation is also likely to drive change. Spending by urban households will increase from RMB10 trillion in 2012 to nearly RMB27 trillion in 2022, according to McKinsey.

The growing middle class is mainly made up of one-child families, giving rise to the “4-2-1” dynamic in which the savings of four grandparents and two parents are often given to a single child. This increasing wealth, along with rising household incomes, means people are examining the ways they save and grow wealth.

Aspirations are increasing and rather than just quality of life, things such as children’s education, both home and abroad, are becoming a focus. With one child potentially supporting four people in their old age, financial security in retirement is also a growing concern.

As China’s consumer society continues to develop, tourism, luxury brands and technology are likely to benefit. China already has the world’s largest number of overseas tourists and the largest proportion of tourist spending. Chinese tourists made an estimated 98 million trips abroad last year, spending more than USD120 billion on travel, while 3.3 billion made domestic trips, spending RMB2.6 trillion (USD429.7 billion) around China.

We expect the number of tourists from China to reach 200 million by 2020 and travellers to move from traditional tourist spots to niche markets. One of the factors driving growth in overseas tourism is luxury goods. Some shoppers want products that are not available in the domestic market, with the top destinations for shopping including Hong Kong, Europe and the US.

China’s luxury boom is also moving online. It is the world’s biggest e-commerce market, with spending forecast to reach USD540 billion next year. As the world’s biggest manufacturer and consumer of smartphones, it will soon be the largest “mobile-commerce” market. These all play a role in increasing domestic consumption, which will drive further development and economic growth.