China Still has Huge Potential for CEOs to Tap

And there’s plenty to be concerned about: the country’s debt levels are rising, its economic growth is slowing and both its stock market and foreign reserves have fallen sharply in recent years.

Laurence D. Fink, CEO of BlackRock, has said everyone needs to be worried about China’s debt pile, while JPMorgan Chase CEO Jamie Dimon warned this year that a recession in the world’s second-largest economy would cost the bank billions.

But there are also reasons to be optimistic, according to McKinsey & Co. If China is able to successfully adopt a new growth model, the management consultancy predicts it could sustain GDP increases at 5.6% per annum over the next 15 years.

“Whether China will realize that potential depends in part on the ability of [its] leading companies to generate and meet demand, raise productivity, and create value, ” McKinsey said in its quarterly CEO guide.

The most important swing factor will be the ability of Chinese citizens to turn from producers to consumers. China’s middle class is spending only about 5%-20% of what the same demographic group spends in advanced economies, leaving a huge potential pool of demand.

In fact, McKinsey predicts the emerging Chinese middle class will be one of three groups that will drive roughly half the increase in global consumption between now and 2030. The others, it said, are retirees in the developed world and 15- to 39-year-olds in North America.

The good news is that there ar already signs that Chinese people are starting to spend more and save less. A recent McKinsey survey, for instance, found that the country’s working-age consumers, compared with peers in other regions, are most inclined to prioritize spending over saving or paying off debt.

Chinese consumers are also increasingly trading up from mass produced goods to premium products, it found, while the country’s burgeoning online community—nearly 690 million Internet users and 700 million smartphone users—provides promising ways to identify and meet latent consumer demand.

“The implication for CEOs is clear: recognize China’s consumer potential and try to get ahead of the curve in meeting the demand,” McKinsey said.

“Some companies may need to beef up the research arm of their sales and marketing organizations. Others may require more sophisticated data analytics to inform their research.”