Is China's consumption 8.8% or 80% of the US?

And what this question means for anyone who has a stake in China?

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A recent series of CF40 articles about the underestimation of Chinese consumption has left a deep impression on me, and I hope the unconventional message in it can be more widely known. The first one is titled China’s Consumption Is Not Nearly as Low as It Appears (“Essay 1”), and the second one is The Value of China’s Consumer Basket in the U.S., Japan, France, Germany, and Mexico (“Essay 2”).

In this article, I will help you take a tour around CF40’s key arguments and key findings. Since CF40 is a public think tank that primarily focuses on macroeconomic analysis and policy recommendations, I will present, at the end of the article, what I believe are the key implications for businesses and investors in China.

What does CF40 say

It’s a widely held view that Chinese people “under-consume” compared to their GDP level. The under-consumption comes in mainly two forms. First, it’s widely believed that Chinese household consumption as a percentage of GDP is lower than in countries at a similar stage of development. Second, in terms of sheer amount of consumption, China also significantly lags behind.

While the CF40 researchers don’t challenge the previous view, they find a lot of problems with the second one.

CF40 used the World Bank’s 2023 GDP data as an example. In that year, the per capita GDP levels of China and Mexico were relatively close, at $12,600 and $13,800, respectively. However, China’s per capita household consumption was merely at $4,936, which is only half that of Mexico. This also means that China’s consumption rate is significantly lower than Mexico’s, with Mexico’s consumption rate at 70.3% in 2023, compared to China’s rate of 39.1%. Compared to the US, China is at only 8.8% of the US’s per capita consumption level.

However, researchers at CF40 believe that this headline number is far from reality and that it has severely underestimated the actual consumption level in China.

How much is China’s consumption undervalued?

CF40 reviews this question from two approaches, reaching similar conclusions.

In Essay 1, CF40 used a “volume-based” approach. The basic idea is this: instead of relying on more “artificial” data points such as GDP and household expenditure, which can be significantly distorted by price levels and exchange rates, CF40 compared the quantity of goods and services that the Chinese people actually consumed.

For instance, in food consumption, an average Chinese person consumed 3,453 kcal/day in 2022, which nearly caught up with France and Germany and was already 90% of the US level. In terms of protein intake, by 2021, China’s per capita level reached 125.9 grams per day, surpassing the level of the United States. Therefore, if we examine food consumption, China’s level should already be comparable to that of the developed world.

In manufactured goods, mainly apparel & footwear, household appliances, and automobiles, there is still a gap between China and developed countries, but the gap is way smaller than what GDP figures suggest:

Compared to major developed countries such as Japan, Germany, and France, China’s per capita consumption of household appliances is approximately 60%-70% of these countries’ levels, per capita automobile consumption about 50%-60%, per capita apparel and footwear consumption roughly 50%, and electronic product consumption around 40%-50%.

It’s only when compared with the US that the gap in terms of the aforementioned manufactured goods is larger. For instance, Americans on average spend more than 4 times as many pieces of apparel as the Chinese, and more than 2 times as many automobiles. However, that gap is still much smaller than the “8.8% of US consumption level” suggested.

Housing-wise, the Chinese people’s per capita consumption level is also very close to the Western level.

China’s per capita floor area is 38.8 square meters, which is very close to Mexico’s 39.6 square meters. Japan, Germany, France, and the United States have per capita floor areas of 45.8, 53.6, 58.8, and 62.9 square meters, respectively, which are 1.2, 1.4, 1.5, and 1.6 times that of China. If we also consider the residential area in China’s rural regions, this gap would further narrow.

Service consumption is a trickier matter to evaluate. CF40 researchers found that if we use average years of schooling as a proxy for the volume of education services, and average life expectancy as a proxy for healthcare services, China is also very close to the levels enjoyed in the developed world.

In terms of tourism, Chinese people travel on average four times domestically, surpassing the level in France and approaching the level in Japan. The gap in terms of international travel is larger, with Chinese people travelling around 0.11 times on average to foreign countries each year, compared with 0.52 times in the US and 0.76 times in France.

In Essay 2, CF40 used a “same basket” approach. The basic idea is to examine the basket of goods and services that an average Chinese consumer spends on in a year and try to determine how much the same basket would cost in countries such as the US, France, Germany, Japan, and Mexico.

There is a key limitation to this basket: not every type of consumption is covered because of a lack of data. The types that covered include food, apparel, footwear, home appliances, automobiles, housing, education, and healthcare, among other things. Notable absences from this “basket” include various types of service consumption, such as transportation services, postal services, cultural and entertainment services, as well as restaurant and hotel services.

If we only look at the “covered“ basket, though, CF40 found that the same basket should be worth $24,748 under the US price system; meanwhile, the comparable basket in the US would be worth $31,150. This suggests that China’s consumption level should be 80% of the US level under this approach.

Estimating the “uncovered” basket is more challenging. But even if we take the most extreme (and very unlikely) assumption that China’s consumption in cultural services, entertainment, dining out, hotels, tobacco, and alcohol is only 10% of the US level, China’s total per capita consumption should still be as high as more than 50% of the US level. The reality, though, should be anywhere between 50% and 80%.

Why is China’s consumption undervalued?

CF40 argues that China’s household consumption is systematically undervalued due to distortions in price levels and exchange rate conversions.

In terms of price level, China’s prices are relatively low. Although economists often use purchasing power parity (PPP) to adjust for price level differences, CF40 researchers found that even the PPP adjustment itself has overestimated the actual price level, rendering it highly inaccurate.

The other distortion comes from the exchange rate. CF40 believes that the RMB has been undervalued:

From the exchange rate perspective, China’s higher actual consumption volume reflects the strong real purchasing power of the renminbi; however, this purchasing power advantage is not fully manifested in the exchange rate level. According to the purchasing power parity theory, exchange rates should reflect the relative price levels of goods between two countries, but the current renminbi exchange rate may be undervalued compared to its real purchasing power.

My takeaway: What does this mean for investors and businesses?

CF40 challenges the long-held view that China’s consumption is extremely low, particularly when analyzing actual consumption volume rather than exchange-rate-converted expenditure. This new perspective, combined with current macroeconomic trends, yields at least five critical takeaways for global investors.

1. The Bet on Massive Volume Expansion is Largely Off the Table

The CF40 reports demonstrate that for many basic necessities, the volume consumption gap between China and developed countries is “far smaller than what is suggested by consumption expenditure figures”. This suggests that a broad investment thesis built on the expectation of massive volume expansion across all consumer goods is unrealistic and ignores the market’s maturity in basic products. Investors should instead focus on specific segments where the volume gap remains—such as high-end consumer electronics and certain durable goods—or regions with untapped potential, like lower-tier markets.

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