Why Is Advertising Way Up in China With Consumer Spending Way Down?

As investment-related growth slows, marketers are banking on the long-term interests of the middle class.

RTR2YO5U-615.pngCarlos Barria/Reuters

If your vision of a commercial in China is a saleswoman following you down the street, you are both right and wrong. While remnants of China's past remain, at least in metropolitan cities like Beijing, advertising follows you in other ways: wall-length posters in subway corridors, Muybridge-motion-picture ads that stream past your subway car window, and talking shopping carts. Chinese viewers of the nation's most popular TV show, Voice of China (中国好声音)had to endure two hours of commercials during the season finale that stretched the viewing time of what would have been a two-hour finale into an episode twice that length.

Ad spending in China has skyrocketed over the last decade, increasing about 14.5 percent a year to reach 681 billion yuan (US$108 billion) in 2011, according to the China Economic Review. For Voice of China, advertisement prices were 1.16 million yuan ($199,330) for a 15-second ad. By comparison, a 15-second ad on American Idol during the finale can cost between $234,050 and $320,000. The ad-monitoring site eMarketer predicts that at its current growth rate, China will become the world's second-largest spender in advertising by next year, surpassing Japan and nipping at the United States' heels.

Yet advertising is picking up at a time when consumerism is slowing down. Though automobile and household appliance sales have gone up, private spending has fallen compared to a decade ago, according to McKinsey. The latest World Bank figures show that private spending in China is only 35 percent of GDP in 2010. The U.S. consumed twice as much and Japan stood at 59 percent of GDP.

"Among urban consumers," McKinsey adds, "the number of first-time buyers -- a group that has been a major driver of category growth in China -- is declining." Derek Thompson reveals that at nearly 30 percent, China still saves a lot more than it spends (and what China does spend, it usually spends on food).

As a Confucian society, saving is highly valued among the Chinese. Studies show they are less prone to impulsive buys than Westerners - nearly 30 percent less than in the U.K. -- but a significant majority of Chinese also have less disposable income due to weak social safety nets. At a panel hosted by the McKinsey China Council of Business Economists in 2009, several Chinese economists pointed out that China's pension program does not cover most rural residents and covers only a third of urban residents. For a rapidly aging society, the elderly may not only have less to spend in the future, hold onto more of their income at the present but their children -- many of them without siblings -- must shoulder the burden of caring for two elderly parents.

While the income tax is only 20-25 percent for the middle class, the 5 different social welfare benefits (i.e., medical, pension, unemployment, etc.) can raise their total tax rate to roughly 40 percent. The numbers have since risen: 55 percent of the Chinese are covered under some sort of pension scheme, even if it can be as low as 55 yuan (US$8.75) a month. Still, 3 years is not enough time to overturn mistrust of the pension system. Local governments, more frequently than not, squander the money. For migrant laborers, about 250 million, pensions do not travel with them across city and regional borders. All these factors encourage the Chinese to keep money under their mattresses instead of putting it to use.

To make matters worse, what seems like a low unemployment rate -- 4.1 percent, to be exact -- may actually be much higher than official estimates suggest. The unemployment rate doesn't capture the country's 250 million migrant workers, many of whom likely lost their jobs during the economic downturn. What's more, the Chinese government often understates figures that might be "embarrassing" or "destabilizing." 

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Rebecca Chao is an editor at techPresident.com. She has written for The Guardian, The Christian Science Monitor, and CNN. 

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