Investors bullish on China often point to the rise of the country's middle class and the potential of its desire to consume.
But in a new book titled "Myth-Busting China's Numbers: Understanding and Using China's Statistics," Matthew Crabbe argues that most investors have a distorted view of what's really going on.
Crabbe told Business Insider that the one thing foreign investors get wrong is that they think of Chinese consumers as one big market, when in fact they're smaller, regional markets.
He further argues that 1. there's an over-reliance on retail sales as a measure of consumption and 2. it is difficult to define China's middle class.
On the former, Crabbe argues that retail sales "substantially overstate what is truly purchased from the retail market." He points out that this data often "represents significant amounts of institutional and corporate sales and wholesale transactions."
On the latter, Crabbe notes that there are various estimates on the scale of the Chinese middle class "but the situation is changing so fast that it is hard to be accurate. This is where China continues to confound even the best most informed pundits, and why making claims about the current size of China's market and its future growth is such a dangerous game."
Here's an excerpt from the interview.
Business Insider: Investors are bullish on the Chinese middle class consumer, but what are they getting wrong?
They've fallen into that China dream.
Matthew Crabbe: A lot of advice I hear, seems to be echoing what I've been saying for a while recently, is really that you can't go to China trying to assume that you can reach 1.3 billion people.
There's this lingering idea that China is this massive market, but it's not. It's a very large country with lots of small, regional markets within it, and I think it's getting that realization. You've got to really understand who your likely consumer is and build out to where they are, which cities, or which city districts they're in, and understand that you have that limited number at the moment. Sure it might grow, but you can't bite off too much. There's so much to learn about the consumers, their aspirations, their buying habits. And not just in the moment …things change so rapidly. Any wisdom you might have had from last year has probably changed this year.
The key thing is really setting those limits and being realistic in those limits which I think is one of the problems that foreign companies in China have had. They've fallen into that China dream. It's that simplistic view and it's something I've been railing against for years.
The other thing that surprises me, is that people try to supplant their business model on to China and I think that's one of the most common problems you see with companies coming in to China — that because their business model worked elsewhere it'll work in China. Of course China has it's own logic or lack of logic. And I think that's one of the hardest things for companies to understand, is that problem of transmuting from one business model to one that applies to China and the Chinese consumers that they understood are the ones that would be most likely to buy their product or service, which is very difficult to grasp.
BI: How do multinationals know what to look at?
MC: I was speaking to an American lady when I was in Shanghai last, who represents a very large American entertainment corporation that's building a theme park in Shanghai. She was saying that one of the problems she has, is that they've identified certain groups of consumer in China. And she's been in China for a while. She understands the difficulty of the data and the problem she has is then communicating that data back to the headquarters. They are asking for certain pieces of information and ways of expressing it and certain economic factors they need to do their planning. But her issue is that the economic data she's giving them isn't telling them the story they need to know. And I think that's one of the most important things, trying to identify the differences within China. Looking for differences in economic outlook in different parts of the country not just in terms of income. You obviously have to look at that to start with, but its the more visceral side as well.
You might have fairly large, wealthy consumers in Yunnan and Heilongjiang in the Northeast, but to expect consumers in these two parts of China to act in the same way is nonsense because Yunnan is sub-tropical and it's very different cuisines, lifestyles and so on, so their whole consume patterns are different. So they might have equal levels of income but unless you understand the geography and the culture, language and history of different places, it's often the intangibles that people don't get, and that's the thing you can only understand when you spend time [there]. And I think that's where it comes in, it's granular, ground up, trying to get China as much as you possibly can.
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