Standard & Poor’s (S&P), an American financial services company, recently completed a report titled Financial Risks Are Rising as Retail and Consumer Product Companies Step Up their Spending Spree. The report projects China, the world’s second-largest economy, will overtake the United States to become the largest consumer market by 2018.
According to the S&P study, total retail sales of consumer goods in China reached $3.29 trillion, a 14.3% growth rate compared with $4.35 trillion in the US market. Also, Chinese consumer companies are seeking growth opportunities outside and planning to conduct overseas acquisitions.
Echoing the S&P report, Rhodium Group (Rhodium), a research firm tracking Chinese overseas investments, noted that Chinese investment in the US hit $6.7 billion in 2012, compared with $1 billion in 2008. Rhodium added, Chinese companies have already invested $2.2 billion in 8 acquisitions and 9 greenfield projects in the US market.
Further, S&P stated that merger and acquisition activities “can strengthen business risk profiles and bring Chinese companies closer to peers in more mature markets.”
However, S&P’s New York based Managing Director, Robert E. Schulz, noted “While further expansion by Chinese consumers and retailers will grow, the track record for organic international expansion in overseas markets is mixed.”
In addition, Schulz claimed the portfolio of Chinese industries remains small or limited, because “retail is a local business and not all brands travel successfully to other markets.” Schulz believes Chinese brands must “face the challenge of competing with well-established foreign brands.”
We invite you to predict when China will overtake America
AMERICA’S GDP is still roughly twice as big as China’s (using market exchange rates). To predict when the gap might be closed, The Economist has updated its interactive chart below with the latest GDP numbers. This allows you to plug in your own assumptions about real GDP growth in China and America, inflation rates and the yuan’s exchange rate against the dollar. Over the past ten years, real GDP growth averaged 10.5% a year in China and 1.6% in America; inflation (as measured by the GDP deflator) averaged 4.3% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of just over 4%. Our best guess for the next decade is that annual GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2018. Alternatively, if China’s real growth rate slows to an average of only 5%, then (leaving the other assumptions unchanged) it would not become number one until 2021. What do you think?