Alibaba's Ma says 30 percent of China retail sales online in 5 years

A study of retail spending data from 266 cities across China by the McKinsey Global Institute (MGI) found that online shopping created as much as 60 percent additional consumer spending in the country's less developed urban areas and as much as 40 percent in top tier cities.

In a country where online spending already rivals that of the United States at around $120 billion a year and could be worth as much as $650 billion by 2020 at current growth rates, that is a net addition of some $260 billion of retail activity.

"This is spending that simply wouldn't otherwise exist," said Richard Dobbs, a co-author of the report and a director of MGI, the research arm of McKinsey & Company.

Total retail sales in China were worth 20.7 trillion yuan ($3.3 trillion) in 2012, according to official government data, and household spending was worth about 34 percent of GDP, according to the World Bank.


The MGI report came a day after Jack Ma, the chairman of China's largest e-commerce firm Alibaba Group, told a conference in Hong Kong that he expected 30 percent of China's total retail sales to be conducted online in the next five years.

Beijing wants to raise consumption's share in the economy as the cornerstone effort to close one of the world's widest gaps between rich and poor and quell discontent among those Chinese who feel they missed out on China's blistering expansion of the past three decades.

Consumption's contribution to growth, however, fell in the fourth quarter of 2012 for the third straight quarter.

About 13 percent of China's population still live on less than $1.25 per day, the United Nations Development Programme says. Average urban disposable income is 21,810 yuan ($3,500) a year.

China also has 2.7 million millionaires in dollar terms and 251 billionaires, according to the Hurun Report, known for its annual China Rich List.

The MGI report reckons the potential for online retail growth is amplified by the fact that, despite broadband penetration of only 30 percent, China already has the world's largest Internet population.

Online spending in China generates about the same percentage share of retail sales as it does in the United States and it is especially important in rural regions, where traditional shopping facilities are severely limited.

REBALANCING RISKS

The MGI team says there are obstacles to online's accretive potential to economic rebalancing, such as a need for capital investment around distribution and logistics infrastructure, but momentum for rapid growth is strong.

"The real question is not whether this is going to happen, because it is happening. The real question is how big is it going to get and at what speed?" Dobbs said.

China's dependence on investment spending for growth -- now at around 50 percent of GDP -- over the last three decades has created huge overcapacity, eroding industrial efficiency despite some of the world's lowest labour costs and requiring increasing amounts of capital to deliver diminishing returns.

That worries investors and makes the International Monetary Fund fret about the risk of creating a global capacity glut.

Raising domestic consumption would reduce dependency on investment and the mountains of exports it helps produce.

Exports are worth around 30 percent of China's GDP. Foreign demand or foreign-funded firms support an estimated 200 million Chinese jobs.

Faltering demand from the debt-ridden European Union and fiscally challenged United States were the root cause of 2012's economic cooling that saw full year growth slip to a 13-year low of 7.8 percent.

Economists say China must raise economic productivity massively to meet a pledge to double household income over the coming decade while spending 40 trillion yuan in the next phase of urban development over the same period to shift 400 million people from the countryside to cities.