Consumption in Modern China - Essay Example

?Chinese Consumer Behaviour Introduction The essay elaborates the difference in consumption pattern between the consumers in China and in the Westernworld. This is the era of mixed economic system, when most of the countries in the world follow free market principles. Consumerism is the pivotal factor of almost all the economic issues undertaken in a nation. The tastes and preferences of the consumers determine and solve the major economic problems of any country. All the problems are solved from the demand actually created by the consumers in an economy. Thus, analysing the nature of consumer’s tastes and preferences is important for determining the long run growth of an economy. The essay enumerates the distinctive nature of the consumers demand in China from that of the western countries (Molano, 2009). Consumption in Modern China The framework of the society of China is primarily collectivistic in nature. The people in China give high value to tradition, conformity and benevolence. However, with the emergence of economic growth and modernization, the country has undergone dramatic changes in its cultural and social aspects (OECD Insights, 2013). Chinese society now resembles individualistic and materialistic principles apart from the ancient collectivistic attitude. The trace of modern consumption pattern in China is observed when some detailed analysis is made over the sales of several goods and services in the shopping malls of the country. It was empirically found that collectivism, individualism and materialism were all directly proportional to the consumption values of the consumers in China (EIA, 2013). These values include epistemic, functional, social and emotional principles in them. For the materialistic and individualistic consumers it can be found that they have greatest magnitude of consumption value (Alabama, 2005).The individualistic and materialistic consumers achieve high utility from consumption of goods and services. However, if the underlying disparities are ignored, then it can be analyzed that the overall living standard of the people in China has improved in the recent era. This is because the country has achieved a substantial growth in its Gross Domestic and National Products (USITC, 2011). China is now regarded as an emerging economy in the world. It is included in the group of BRICS, who are the nations showing higher growth rates in the world than the developed economies. It is believed by the analysts that by 2050 China’s growth will surely make it one of the global leaders in the world (World Bank, 2013). Since 1970 the country has undergone rapid development in its industrial sector. Consumer Value Analysis (Source: Alabama, 2005) The above diagram elaborates the idealistic values of the consumers in China in the modern world. Consumer behaviours can be estimated by observing the actual purchase decisions of the consumers in the economy. It can also be estimated by studying the amount of expenditures made by the consumers in China. It is found that the relation between the consumption value and socio cultural value is extremely high in modern China. Those consumers who have high social values are more attracted towards the expensive branded goods and services. These rich consumers invest high in conspicuous consumption. On the other hand, the consumers who have less social values and are not very rich and generally go for less speculative investments (Selden, 1993). On the other hand, most of the emerging economies in the world are enumerating high level of debt crisis in their economies. The sovereign debt crisis in the European economy has slowed the velocity of circulation of money in the European nations. Thus, the European Central bank is now implementing quantitative easing by which the commercial banks are able to get access to some fluid fund to lend the borrowers. Thus, the consumers in the western world are now having less purchasing power. Unlike the emerging affluent classes in China the consumers in the western countries are going for lower level of conspicuous consumption. They lack the purchasing power to demand expensive of luxurious and comfort goods. This is the reason for which popular business firms like Mercedes are now launching new schemes that would help them to tap the growing middle and lower class income groups in the developing countries like China. On the other hand they are reducing their scale of operations in the western developed economies (Morrison, 2012). The situation is almost same in America, where the state is promoting welfare oriented activities and has imposed high taxes in luxurious consumption expenditures incurred in the economy (LOC, 2004). State Policies towards Foreign Direct Investments in China’s Retail Market The growth of an economy depends on the level of Foreign Direct Investment (FDI). In the modern era most of the countries in the world follow free market principles. In this kind of a market structure the operations of the private business corporations are under the regulations of the government. In the Republic of China, the state plays an important and strong regulatory body (Aoki and Wu, 2012). The dominating principles of the state have helped in the economic progress of the country to a large extent. The policies of the state towards FDI have been extremely liberal since the last few years. The retail sector of the economy has progresses rapidly with the rise in the FDI levels. Since 1978 after the reforms, the government of China has gone for open door policies to promote foreign direct investments (Hayashi, 2002). The initiation of such liberal policies was guided by Deng Xiaoping. At the beginning, the government established special enterprise zones (SEZ) that helped in facilitating the foreign Greenfield investments in the country. The government provided special incentives to the foreign companies who desired to establish their business branches in the SEZ (NPR, 2013). However, there were certain restrictions imposed by the government to these firms regarding the profit transfer. In the next stage of the open door policies undertaken by the government, the foreign enterprises were allowed to invest in the domestic firms of the Chinese economy. The Chinese retail sector started flourishing as a result of these liberal policies undertaken by the state. In order to augment the extent of economic growth of the nation, the government banned the system of profit transfer that was followed by the foreign companies (Dierks, 2005). Chinese retail and manufacturing sector became highly dependent on the magnitude of foreign investments in the economy. In order to promote the level of international trade, the government of China reduced the tariff rates in the country, both for imports and exports. The policies of the World Trade Organization (WTO) were in favour of the lower tariff rates in the country (Hendrischke, 2013). Thus, the state policies towards FDI in China’s retail market were liberal and helped the country to grow overtime. The domestic sectors in the country turned out to be more efficient due to their exposure to foreign competition. China generated substantial amount of industrial surplus that helped the retail market to grow (Wright, 2006). As discussed in the previous context the modern materialistic and individualistic consumers in China now get an access to a large variety of goods and services to choose from their growing retail industry. On the other hand, the foreign investors are showing less interest to invest in the depressed markets of the developed western economies. The European Central bank is offering loans at 1% rate of interest to the commercial banks in return of viable and worthy government bonds. This is done to provide the commercial banks with resources that can be offered to the entrepreneurs in the economy. Theoretical notions of ‘the consumer’ In general the concept of consumer may seem to refer to an individual buyer. In economics the theoretical notion of ‘the consumer’ is not treated as a person separately, but is aggregated as an economic entity, who takes the decision about the purchases in the economy (Assael, 2005). The consumer gives considerable importance to the difference in qualities of the product claimed to be given by the company and the actual product served. The character of consumer behaviour is interdisciplinary in nature, which borrows concepts of various subjects like sociology, economics, psychology and social anthropology (Atikian, 2013). The primitive theories of consumer behaviour are based on the psychological perspective of utility analysis. With this analysis it can be stated that the growing rich classes in the Chinese economy are enjoying higher utility from consumption of goods and services, as their purchasing power is growing (Blythe, 2013). On the other hand the people living in the western economies share lower utilities because their real income level is falling due to depression in the economy. During 1940’s socialistic views were introduced to elaborate peculiar consumer behaviour theories like Veblen Effect, that explained that consumers judge the quality of a product according to the price required to pay for it. There are certain basic principles that are followed by the consumer behaviour theories (Nayak, 2013). Prices of goods and services are inversely related to the consumers demand for it. The consumers demand is falls for a product when the price of its substitutes collapses. If the product concerned is not inferior in nature, then the consumer demand for it increases with the rise in the real income level. The consumers respond positively to the promotional expenditures incurred for a product. The cardinal concept of utility claimed that the level of utility derived by a consumer is measurable (Thun, 2006). The Law of diminishing marginal utility states the additional utility derived from addition consumption of a unit of a commodity decreases as a consumer increases the consumption of the product by units. However, the modern theoretical notions state that utility cannot be measured it can only be compared. This is the ordinal concept of utility, where the consumers maximize their utility subject to their budget constraint. Utility Maximization Price of product A C Io Price of product B (Source: Authors Creation) The graph denotes the modern view of consumer theory. Io is the indifference curve that shows the same level of utility that a consumer may get from various combinations of consumption of two products, namely A and B. The budget curve is denoted by C. The optimal consumption choice for the consumer is the point of tangency between the budget and the indifference curve. The higher the level of indifference curve the greater is the level of utility derived from consumption (Pearson, 1992). It is believed that in the long run the consumption expenditure of consumers is directly proportional to the level of their income. A refection of the behaviours of the consumers in the economy subject to liquidity constraints, which can be found by following the Keynesian view; C = (1 - s) (Y - T); where C=consumption expenditure. S=savings. Y=income level. T=tax rates (Naughton, 2007). The Permanent Income Hypothesis states that assuming perfect foresight, the consumption expenditure of a consumer depends on permanent income but not on the present income. The life cycle hypothesis states the change in the pattern of consumption of the consumers at different points of their life (Negishi, 2001). Life Cycle Hypothesis (Source: Authors Creation) This theory explains that at younger ages the consumers tend to consume more than their income so they borrow from the market (Shi, 2010). As they grow older their borrowing falls. Finally at the time of their death they keep savings, which denotes that over their lifetime they have earned more than what they saved. The consumer demands also depend on the changes in the real interest rates in the economy (McNeal, 2007). Specifications of Consumers and Consumer Markets in China Since 1980, the extent of beef consumption in China has substantially increased. However, the amount of pork and poultry consumption in China is higher than that of beef consumption. Per Capita Beef Consumption in China (Source: Kansas State University, 2011) The above graph shows the rise in per Capita beef consumption in China. This denoted that most of the Chinese consumers are non vegetarians. Actual and Projected per Capita Income Level in China (Source: Kansas State University, 2011) The above graph shows the actual and projected rise in the per Capita income level of the Chinese consumers (Kansas State University, 2011). With rise in purchasing power, the demands for luxury goods have increased in China. The demand for electronic products in China is growing with time despite of the recessionary trails in the market. Business entrepreneurs all across the world find the consumer market for China to be safe for investments (Bell, 2008). The country with the largest population in the world serves excellent demand for various goods and services produced in the economy (Naik, 1999). It was analyzed in the old theories that the marginal propensity to save is higher in the developing economies than the developed ones. After observing the growing retail market of China, it seems that these theories are no longer applicable in the modern economic world. Developing economies in the world like China, India and Russia are experiencing high domestic demands in their retail sector (Lu, 2011). The demand is sometimes so high that it adversely affects the balance of payments of these nations. This is because these nations import more than what they export, to sustain their domestic requirements. Most of the consumers of China are increasing their demands for sophisticated products in the recent epoch. Multinational companies like Coca Cola, Procter & Gamble and Ericsson consider China to be their most profitable market for business in Asia or sometimes even in the world (Lu, 2011). Reference List Alabama, A., 2005. The Chinese Consumers’ Changing Value System, Consumption Values and Modern Consumption Behaviour. [pdf] Available at < http://etd.auburn.edu/etd/bitstream/handle/10415/480/XIAO_GE_36.pdf > [Accessed 23August 2013]. Aoki, M. and Wu, J., 2012. The Chinese economy: A new transition. Basingstoke: Palgrave Macmillan. 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