1. Asian Demographics LtdChina Contents page 1 China A detailed report on the demographic and socio- economic changes projected to occur in China between 2003 and 2023. Copyright: Asian Demographics Ltd 2003 Released December 2003 Asian Demographics Ltd ForecastAsia

2. Asian Demographics LtdChina Contents page 2 About Asian Demographics Ltd Asian Demographics specializes in the collection and analysis of demographic data to provide a perspective of the demographic future of Asia. Asian Demographics is able to provide unique and insightful reports on the demographic trends of Asia and their implications for consumer products and services by combining in-house statistical skills and knowledge of the consumer markets of Asia with its unique data bases. Econometric style models have been built using the in-house databases which cover all the major countries of Asia and extend back 30 years covering a wide range of demographic and socio-economic series, harmonized to enable comparison between countries. Contact Information For more information about Asian Demographics Ltd. visit the company’s web site at: www.asiandemographics.com or www.asiandemographics.com Email: salesdept@asiandemographics.com Hong Kong Office Ph/voice mail:+852 25732950 Address7/F Shun Ho Tower 24-30 Ice House Street Central, Hong Kong New Zealand Office Phone/Fax/Voice: +64 (09) 529-0090 Address: 2 Lucerne Road Remuera, Auckland New Zealand

3. Asian Demographics LtdChina Contents page 3 Licence and Limitation of Liability Licence Conditions The Reports/models are sold on the condition they are used only by the purchasing company ('The Company') for its planning purposes. 'The Company' refers to the entity placing the order and its majority owned subsidiaries. The purchaser may copy the reports/models for the purposes of use within The Company' and in different offices of 'The Company'. The Company may share the Reports or Models with third parties contracted to 'The Company', such as consultants, on the understanding that they use it purely for 'The Company's' purposes and that they do not copy or disclose information to any other party. The purchasing company may not disclose the contents of the reports/models, or any information derived from it to persons outside 'The Company' without prior written permission by Asian Demographics Ltd. This permission will not be unreasonably withheld provided it does not constitute more than 10% of the report, involves some added analysis by ‘The Company” and accreditation is duely given to Asian Demographics Ltd.. In the case of the purchasing company being a consulting firm using the reports/models to assist a client, the model is deemed to be purchased for that client. In the event that the same information is required for a separate client a new Licence must be purchased. Limitation of Liability The user is advised that Asian Demographics Ltd has taken due care in the preparation of its Reports and Models. Every effort has been made to ensure that the base data used for the analysis is correct and reliable, and the correct analytical procedures have been applied and done with care. However, the very nature of forecasts is that they use past relationships to project forward, and there is no guarantee that historic relationships will in fact hold in the future. As such the results given by the report or model should be treated as an indication of the likely nature of the market in the future given past behavior. ASIAN DEMOGRAPHICS LTD. MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY ANY PERSON OR ENTITY FROM THE USE OF INFORMATION PROVIDED AND MAKES NO WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE OR USE. IN NO EVENT SHALL ASIAN DEMOGRAPHICS LTD OR ITS AFFILIATES BE LIABLE TO USERS OR ANY THIRD PARTIES FOR DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, HOWEVER ARISING, INCLUDING WITHOUT LIMITATION IN THE EVENT SUCH DAMAGES WERE DUE TO THE NEGLIGENCE OF ASIAN DEMOGRAPHICS LTD OR WHETHER SUCH DAMAGES WERE FORESEEN OR UNFORESEEN.

4. Asian Demographics LtdChina Contents page 4 Significant Trends Total Population –Currently 1.279 billion persons –largest population in Asia. –Projected to stop growing in 2014 and by 2023 the total will be 1.282 billion. –Population will peak in 2014 at 1.3 billion Age Profile –Rapidly declining total births per annum and increased life span shifts age profile. –By 2023 population ‘bulge’ moves from being under 15 to 39 years to 35 to 55 years. –between 2003 and 2023. Under 15s decline at 3.4% pa 15 to 24 years decline at 3.5% pa 25 to 39 year decline at 0.7% pa 40 to 59 year grows at 1.7% pa 60+ grows at 3.9% pa –Significant implications for next two decades as very substantial decline in the youth population means: Significantly fewer women of child bearing age and rapid decline in total births Lack of growth in labour force. Life cycle Stages –In 2003 ‘young singles’, Young married with no children’ and ‘Married with a child account for over 75% of adults.’ –However, growth stages are all the older stages. –As a result by 2023 Working age and retired empty nesters will be 44% of adults and the younger groups will have declined to 43% of adults.

5. Asian Demographics LtdChina Contents page 5 Significant Trends Urbanization –40.2% of population is in urban areas in 2003. With improving education this will increase to 57.2% by 2023. –This is 11 million additional urban dwellers each year –Migrant labour from other areas is an issue and in 2003 accounted for 30% of Beijing’s populations and 20% of Shanghai. –Overall migrants are about 10% of populations. –Provincial capitals are particularly important economically. In 2003 they are 9% of the total population but account for 31% of earned income. The Household –Total households growing at 1.1% pa 2003 to 2023 –Households size declines from 3.31 to 2.7 persons in same period. –Households with more than 5 persons are declining in number. Smaller households are where growth is. –There will be more urban households than rural households after 2010. Education –Rapidly improving. –Proportion with Secondary or better projected to grow from 57% in 2003 to 76% in 2013 –Number of tertiary educated persons in the population is growing at 5% pa 2003 to 2023. –Number of school age children declining by 11 million pa between 2003 and 2013.

6. Asian Demographics LtdChina Contents page 6 Significant Trends Labour Force –Grows at 0.7% pa to 2009 when it peaks at 785 million. Then declines at -0.76% pa through to 2023. –Agriculture declining in absolute number. –Skilled white collar sector grows at 2% per annum in next decade but declines at - 0.1% for the subsequent decade. –Skilled white collar occupations projected to grow from 30% of labour force in 2003 to 39% by 2023. Labour Force Impact on GDP –Productivity per worker will grow by a larger absolute amount, but slower rate. –That combined with slower labour force growth means total GDP growth will average 5.2% per annum to 2013. –GDP per capita will average 5.0% pa for the same period. Urban Households Income and Expenditure –Average in 2003 is Rmb 26,370 –Projected to increase to Rmb 35,028 in 2008 and Rmb 41,803 by 2013. –US$ values are 3,185, 4,234 and 5,049 –Represents 5.9% growth pa to 2008 and 3.6% for 2008 to 2013. –Top quintile in 2003 is earning over Rmb 34,378 (US$4,152) and above –Number of households earning more than that will grow at 17.8% pa to 2008 –Average household spends 76% of income. –Total expenditure of all urban households projected to grow at 7.6% pa to 2013. Savings will grow at 9.3% pa over same period. –Top quintile accounts for 34% of all household expenditure in 2003. –Housing, clothing and Food account for 62% of average household’s total expenditure (57% of top quintile’s expenditure).

7. Asian Demographics LtdChina Contents page 7 Significant Trends Rural Households Income and Expenditure –Average in 2003 is Rmb 11,167 –Projected to increase to Rmb 12,915 in 2008 and Rmb 14,556 by 2013. –US$ values are $1,349, $1,560 and $1,758 –Represents 2.7% growth pa. –Top quintile in 2003 is households earning over Rmb 14,803 (US$1,788) and above –Number of households earning more than that will grow at 6.8% pa to 2008 –Average household spends 65% of income. –Total expenditure of all rural households projected to grow at 1.2% pa to 2013. Savings will grow at 4.2% pa over same period. –Top quintile accounts for 36% of all household expenditure in 2003. –Housing and Food account for 75% of average households total expenditure (67% of top quintile’s expenditure)

8. Asian Demographics LtdChina Contents page 8 Summary Contents Population1515 Lifecycles Stages4040 The Household4444 Education5353 The Labour Force 5858 Labour Force and the Economy6464 Household Income and Expenditure7070 Urban7575 Rural9090

9. Asian Demographics LtdChina Contents page 9 Table of Contents The Population15 Total population growth rates16 Long term population projection: 205017 Growth relative to Asia18 Comparative age profiles 2003 to 200819 2003 to 201320 2003 to 202321 Relative importance of age segments22 Average age relative to Asia23 Propensity to have children and females of child bearing age24 Trend in total births25 Segment size trends 0 to 14 yeas olds26 Value of 0 to 14 yr olds27 15 to 24 year olds28 Value of 15 to 24 yr olds29 25 to 39 year olds30 Value of 25 to 39 yr olds31 40 to 59 year olds32 Value of 40 to 59 yr olds33 60 + year olds34 Value of the 60 yrs + Market35 Urbanization36 Urban Migration37 Importance of Provincial Capitals38 Working age population39 Lifecycle Stages40 Changing size of lifecycle stages41 Projected growth rates42 Lifecycle profile of key age segments43 The Households44 Total number of households and associated growth rates45 Growth relative to Asia46 Profile of households by size47 Age profile of householders48

10. Asian Demographics LtdChina Contents page 10 Table of Contents Proportion of households with children49 Trend in average household size50 Estimated number of urban and rural households51 Total number of households and associated growth rates52 Education53 Education profile of persons 15 yrs +54 Education profile relative to Asia55 Number of persons with post- secondary qualifications56 Number of school age children57 The Labour Force58 Size and growth of the employed labour force59 Growth rate relative to Asia60 Trend in propensity to work61 Changing occupation profile62 Changing size of key occupation groups in the labour force63 Labour Force and the Economy64 Trend in gross productivity per labour unit and size of labour force 65 Implications for real GDP growth66 Implications for real GDP per capita67 US$ GDP per capita relative to the Asia region68 Dependents per employed person69 Household Income70 Trend in average urban and rural household income71 Growth rates in average urban and rural household incomes72 Comparative Distributions of Urban and rural households: 200373 Is the data reliable74 Urban Household Income and Expenditure75 Changing shape of the distribution 1995 to 201376

11. Asian Demographics LtdChina Contents page 11 Table of Contents Projected distribution by Quintiles Rmb values77 US$ values78 Sensitivity to 1% variation in real total GDP growth rate79 Sensitivity of top quintile to 1% change in GDP growth rate80 Urban Household Expenditure Patterns81 Average propensity to spend82 Implications for absolute amount spent and saved83 Total Expenditure and savings of all households85 Average pattern of expenditure per household86 Trend in average absolute expenditure per household87 Relative importance of quintiles88 Expenditure pattern by quintile89 Rural Household Income and Expenditure90 Changing shape of the distribution 1995 to 201391 Projected distribution by Quintiles Rmb values92 US$ values93 Sensitivity to 1% variation in real total GDP growth rate94 Expenditure of Rural Households 95 Average propensity to spend96 Implications for absolute amount spent and saved97 Total Expenditure and savings of all households99 Average pattern of expenditure per household100 Trend in average absolute expenditure per household101 Relative importance of quintiles102 Expenditure pattern by quintile103

12. Asian Demographics LtdChina Contents page 12 Summary Statistics

13. Asian Demographics LtdChina Contents page 13 Summary Statistics

14. Asian Demographics LtdChina Contents page 14 Summary Statistics

15. Asian Demographics LtdChina Contents page 15 The Population This section examines the major trends in the Population of China. In addition to looking at the trend in the overall population in the medium (next 5 years) and long term (next 10 and 20 years) it examines the trends for specific age/life cycle segments. Note: Detailed yearly data of total population, males and females by 5 year age groups, birth rates and total births, death rates and total deaths by gender are provided in Tables 1.1 to 2.7 in the accompanying Excel File.

16. Asian Demographics LtdChina Contents page 16 Total Population Growth Rates: 1983 to 2023 Next 5 years (2008) Total population is projected to increase at the rate of 0.2% per annum taking it from 1.279 billion to 1.293 billion persons. Next 10 years (2013) Total population is projected to increase by 0.2% per annum or 1.6% for the entire period. This is an additional 20.87 million persons, compared with 95.5 million for the previous decade demonstrating the structural change that is taking place in the population dynamics. Next 20 years (2023) By 2023 the total population of China is projected to reach 1.282 million persons. This reflects negative population growth after 2014.

17. Asian Demographics LtdChina Contents page 17 Long Term Population Projection to 2050 Based on the most recent data available from the 2000 Census and the change in behavior evident from 1990 (last census) in respect to trends in births and deaths the projection model indicates that the population will peak in 2014 at 1.3 billion persons. As shown subsequently in this report, this is very much a function of the combined effects of a reduced propensity to have children and a significant reduction in the number of women of child bearing age as the one child policy takes affect on the size of that age group. It should be noted that as a proportion of the total population, immigration and emigration are not significant issues.

18. Asian Demographics LtdChina Contents page 18 Relative to Asia: 1992 to 2022 Relative to other low income countries, specifically India and the Philippines, China has a much lower population growth rate. In many respects this gives China a strategic advantage as its ability to educate and develop its (fewer) children increases.

19. Asian Demographics LtdChina Contents page 19 Comparative Population Age Profile: 2003 and 2008 For this time period: –the bias of the population is substantially to the 15 to 39 year age group and –All age groups under 35 years are projected to experience a considerable decline in number. –Age groups in the range 40 to 59 will grow rapidly in number.

20. Asian Demographics LtdChina Contents page 20 Comparative Population Age Profile: 2003 and 2013 The population bulge continues to move up and hence the projected size of the older age groups starts to increase. In contrast the size of the youngest age groups declines significantly. The total number of persons under 20 years of age is projected to decline by 36% between 2003 and 2013.

21. Asian Demographics LtdChina Contents page 21 Comparative Population Age Profile: 2003 and 2023 This shows how dramatically the population profile of China is expected to change over the next 20 years. This change will have implications for the range of products and services that will be in demand.

22. Asian Demographics LtdChina Contents page 22 Relative Importance of Key Age Segments: In 2003, persons aged 40 years and above accounted for 36% of the population, or effectively 1 in 3 persons. By 2023 it is projected that this will have increased to 58% (or 1 in 2 persons). Conversely, those under 25 years of age are projected to decline from 36% (or nearly one in three persons) to 27% (one in four persons) by 2023.

23. Asian Demographics LtdChina Contents page 23 Average Age Relative to Asia 2002 and 2022 With the quite dramatic impact of the reduction in births on the population profile in the space of 20 years China will move from being a middle aged country (33 years) to one of the older countries (43 years). By then only Japan and Hong Kong will have an older average age.

24. Asian Demographics LtdChina Contents page 24 Propensity to Have Children and Females of Child Bearing Age: 1990 to 2023 There has been a substantial decline since 1990 (if not earlier) in the propensity of women of child bearing age to have a child. It has reached the point where the rate of decline must slow in order to stay in line with the level for more developed countries and that has been assumed for the projections. The big change is, however, in terms of the number of women of child bearing age (15 to 49 years). This suffers what might be called a “demographic shock” as a result of the combined effects of the earlier introduction of the one child policy and the bias of births to males.

25. Asian Demographics LtdChina Contents page 25 Trend in Total Births: 1993 to 2023 As a result of fewer females of child bearing age and a reduced propensity to have children, for the period 2003 to 2013 it is projected that the total number of births per annum will decline by 18%. By 2023 it is projected that there will be 44% fewer births per annum than in 2003. The decline in total births for the period 1990 to 2000 is confirmed by the census data – specifically the number of people in the 0 to 10 year age groups in 2000.

26. Asian Demographics LtdChina Contents page 26 The Child Population 1993 to 2023 The 0 to 14 year age group is projected to decline as a proportion of the total population from 19% in 2003 to an estimated 10% by 2023 It is projected that between 2003 and 2008 this segment will reduce by 55 million individuals or 6.0% pa. By 2013 it will have reduced by a further 31 million individuals, a further 3.6% pa decline. Collectively in the next decade this segment is projected to reduce by 86.5 million individuals or 35%.

27. Asian Demographics LtdChina Contents page 27 The ‘Value’ of the Child Market Such is the reduction in the number of children, that it substantially offsets the projected 6.9% pa increase in the income per capita of households for 2003 to 2008. As a consequence the total value (average income per capita multiplied by the number of persons in the age group) of the child market is projected to show 1.5% pa growth over the next decade to 2013.

28. Asian Demographics LtdChina Contents page 28 The Young Adult Market 15 to 24 Years In total this segment is projected to show only a small increase in size over the next 5 years (growing by 5.6 million persons). It is then projected to decline by -4.3% per annum through to 2013 and this continues through to 2023 at an increasing rate. These changes mean that as a proportion of the total population this segment is projected to decline from 17% in 2003 to 9% by 2023.

29. Asian Demographics LtdChina Contents page 29 The ‘Value’ of the Young Adult Market If it is assumed that the expenditure (affluence) of this age group increases in line with that of the average household per capita income then the ‘value’ of this market segment is projected to grow by 7.4% per annum between 2003 and 2008 when there is still growth in the size of this segment. For the period 2008 to 2013 the decline in the size of the segment (-4.3% per annum) offsets the increase in per capita income (5.3% per annum) and as such the total estimated expenditure by this age group is projected to grow by a more sedate 0.8% per annum.

30. Asian Demographics LtdChina Contents page 30 The Young Householder Market (25 to 39 Years) This age segment is projected to decline by -7% over the next 5 years to 2008 losing 24.1 million persons. For the period 2008 to 2013 the rate of decline decreases to 6.4 million persons, which represents an average annual rate of decline of -0.4%. After 2013 this age segment declines further at a rate of -0.5% per annum. Within the context of a growing total population this means that as a proportion of the total population this segment declines from 28% to 24% between 2003 and 2023.

31. Asian Demographics LtdChina Contents page 31 The ‘Value’ of the Young Householder Market The ‘value’ of this segment is projected to increase at an annual rate of 5.4% per annum for the period 2003 to 2008, and then at 4.9% per annum to 2013. These rates of growth in ‘value’ are a function of both the projected increase in per capita income and the projected small decrease in the number of persons in this age segment through to 2013.

32. Asian Demographics LtdChina Contents page 32 The Middle Aged Householder Market (40 to 59 Years) This age group is projected to be the high growth segment of the next decade. It is projected to increase by just over one third in size in ten years. It represents a ‘wave’ of householders who are now used to consumerism entering the empty nester/mature household stage with huge implications for demand for many new products and services.

33. Asian Demographics LtdChina Contents page 33 The ‘Value’ of the Middle Aged Householder Market The projected rapid growth in the total size of the segment (as shown on the previous page) combined with the expected increase in per capita income (for 2003 to 2013) means that the estimated ‘value’ of this age segment is expected to increase significantly. Between 2003 and 2008 it is estimated to increase at the rate of 10.9% per annum, and then at 7.6% per annum for the subsequent five years.

34. Asian Demographics LtdChina Contents page 34 The Older Person Market (60 Years +) This age group is still a relatively small proportion of the population of China. In 2003 it is estimated to be 11% of the total. Between 2003 and 2008 it is projected that the total number of persons over the age of 60 years will increase by 17% (or 3.1% per annum). The growth rate is projected to accelerate to 5.1% per annum for the next 5 years to 2013 and then continue at a more moderate 3.6% per annum through to 2023. As a result, by 2023 persons 60 years and older will account for 24% of the total population, and the segment will have doubled in absolute size.

35. Asian Demographics LtdChina Contents page 35 The ‘Value’ of the Older Person Market The combination of a rapidly increasing number of persons in the segment and increasing average affluence results in an indicated growth in ‘value’ of this age segment of 10.2% per annum for the next 5 years, and then 10.6% per annum for the subsequent five years to 2013. The problem with this segment is that they, like the previous age segment, are generally poorly educated and have had a very low earnings history. As such their capacity to consume is extremely limited.

36. Asian Demographics LtdChina Contents page 36 Urbanisation Current estimates from the State Statistical Bureau put 40.2% of the population as being urban dwellers. That is engaged in non-agricultural activity and living in a village/town/city of more than 20,000 persons. The rate of improvement in education is steady in China and as a result there is projected to be a steady increase in the proportion of the population that is urbanized. By 2013 it is projected to have reached 49%. This trend is projected to continue at least until 2023 by when the total urban population is projected to be 43% greater than what it is estimated to be in 2003.

37. Asian Demographics LtdChina Contents page 37 Urban Migration A related issue is the question of movement of populations from less prosperous area to more prosperous ones in search of higher incomes. Data on this is becoming available now and the picture for two cities and one more prosperous province is as shown opposite. The surprising item here is that Shanghai has less migrants than Beijing. Overall (nationally) about 10% of the population is living in locations away from their official place of residence.

38. Asian Demographics LtdChina Contents page 38 Provincial Capitals In terms of share of total population the provincial capitals account for just 9%, but because they have significantly smaller average household size they account for 20% of all households (both urban and rural). In addition, these cities tend to offer the higher value (more productive) jobs and as a consequence the households in the Provincial Capitals account for 31% of the total earned income of all households in China. and 46% of all households earning over Rmb 40,000 pa in 2003. Thus targeting 9% of the population reaches nearly half the affluent market of China.

39. Asian Demographics LtdChina Contents page 39 Working Age Population Working age is defined as 15 to 64 years inclusive and the number of persons in this age band is an essential determinant of the size of the labour force. For the period 2003 to 2008 there is projected to be an additional 52 million persons of working age each year. For the period 2008 to 2013 the number of additional working age persons per annum is projected to be just 17 million or about one third of the grow rate of 2003 to 2008. After 2013 it starts to decline. This has direct implications for the size of the labour force and in turn the total GDP of the country.

40. Asian Demographics LtdChina Contents page 40 Lifecycle Stages –Young Single; typically persons 15 to 39 years of age and not married. –Young Married, no Children –Young Married with at least one child under 10 (i.e. still a young family) –Married and Youngest Child is over 9 years of age but under 20 (and deemed to still be economically dependent on the parents) –Working Age Empty Nester: Being persons under the age of 64 years and whose children are now over 20 years and therefore deemed economically independent. –Working Age Older Single: Unmarried persons or Widow aged 40 to 64 years. –Retied Empty Nester: Married and over 64 years of age, typically no dependent children as all are over 20 years of age. –Retired single/Widow/Widower: Over the age of 64 and single. The concept of ‘Life Cycle’ generally encompasses the different stages as listed in the left hand column of this page. As will be apparent to the reader, the needs and wants of an individual change as they progress through these stages and this is a useful basis for defining just who efforts should be targeted at. Note: A detailed Table giving the age and gender profile of each life cycle stage is given in the second worksheet in the accompanying Excel file.

41. Asian Demographics LtdChina Contents page 41 Changing Size of Lifecycle Stages As shown in the chart opposite, the younger life cycle segments (Young single through to married with youngest child over 9 years) are projected to decline slowly in number to 2013 and then quite rapidly through to 2023. This applies particularly to the two stages including children. All growth in the absolute size of a segment takes place in the four older segments, with the working age empty nester showing particularly strong growth. From 102 million persons in 2003 to 343 million persons in 2023.

42. Asian Demographics LtdChina Contents page 42 Projected Growth Rates of Stages This is the compound average growth rate (CAGR) of the number of persons in each life cycle stage as shown on the previous page. In both the short and medium term the growth is really concentrated in the four older life cycle stages. However, do note the projected growth of the ‘married with older child’ segment in the next five years.

43. Asian Demographics LtdChina Contents page 43 Life-cycle Profile of Key Age Segments - 2003 Age segments (however defined) typically encompass at least three and often four life cycle stages and from a marketing point of view it is important to understand that. The age segments discussed in the earlier section on the age profile of the population are replicated here – by life cycle stage in 2003.

44. Asian Demographics LtdChina Contents page 44 The Household A household is defined as a group of individuals living together as an independent economic unit. A nuclear household/family is the most common form and that is parents living with 1 or 2 never married children. The Household is a crucial aspect of the socio-economic environment of a country. Many financial decisions, including the level of individual daily consumption, are taken within the context of the family budget. That in turn is a function of the size of the household, age composition and stage in life cycle of the different members of the household. Note: A detailed Table giving the number and distribution of households by size for each year is given in Table 4.1 in the accompanying Excel file.

45. Asian Demographics LtdChina Contents page 45 The Total Number of Households and Associated Growth Rates Next 5 Years (2008) The total number of households is projected to increase by 26.5 million over the next 5 years. This is a 6.9% increase and a growth rate of 1.3% per annum This compares with 2.7% growth for the previous 5 years, when 47 million households were added. Next 10 Years (2013) There are projected to be 51.4 million additional households over the next decade, down from 92.1 million in the previous decade. The growth rate in total number of households is expected to slow further for the period 2013 to 2023.

46. Asian Demographics LtdChina Contents page 46 Growth Rate in Total Number of Households — China Relative to Asia The rapid decline in the number of people entering marrying age, combined with the now slowing decline in average household size (number of persons) results in China’s position changing from being in the middle for the region for the period 2002 to 2012 to ultimately being one of the slowest growing for the period 2012 to 2022 at 1% per annum.

47. Asian Demographics LtdChina Contents page 47 Profile of Households by Size Continued (and in fact accelerated) growth is projected for single and 2 person households. This will be the result of both young people becoming more independent and also delaying the arrival of the first child and also the increasing number of older households where the children have left home. The 3 and 4 person household also continues to grow in number and is really the core household profile. However, the growth rate of that group slows substantially after 2013. In contrast the 5 or more person households is steadily declining in number.

48. Asian Demographics LtdChina Contents page 48 Age Profile of Householders Some measure of the overall age profile of householders can be determined by looking at the age profile of married persons. Whereas in 2003 an estimated 52% of married couples (and to some extent households) consisted of adults aged over 40 years, by 2013 it is estimated that they will have increased to 67%. This means most purchasers for household products will be over the age of 40 years, and one in five of them will be over the age of 60 years in 2013.

49. Asian Demographics LtdChina Contents page 49 Proportion of Households (urban and rural) with Children With the changing life cycle profile of the population the very nature of households is changing. Already 36% of households have no economically dependent child in them and this is projected to reach 51% by 2013.

50. Asian Demographics LtdChina Contents page 50 Trend in Average Household Size Household size has been declining steadily since 1983 (although there are some short term fluctuations – probably as a result of sampling). The rate of decline is projected to slow for the next decade as family sizes get close to an average of 3. It is worth noting that rural households, while larger in size have experienced a very similar rate of decline in average size. Note. The average household size of rural households in this report is lower than that from official sources. The official sources somewhat overstate the number (the number of household times average household size exceeds total population). We have assumed that the error relates to rural households

51. Asian Demographics LtdChina Contents page 51 Estimated Number of Urban and Rural Households The urbanization of the population means that the number of rural households will probably stabilize around the present (2003) level and then decline, whereas the number of urban households will grow rapidly in number. It is expected that the number of urban households will exceed the number of rural households by 2010.

52. Asian Demographics LtdChina Contents page 52 The Total Number of Urban Households and Associated Growth Rates Relative to total households, the number of urban households is growing at a much faster rate reflecting the trend in urbanization. In fact the growth statistics are quite substantial. In the next 5 years there is expected to be an additional 30.8 million urban households. That is an average of 6.1 million per annum. This quite rapid growth of around 60 million additional households a decade is projected to continue to 2023. By 2023 the total number of urban households will have increased by 76% over the number in 2003.

53. Asian Demographics LtdChina Contents page 53 Education Education is probably one of the most important drivers of the shape of society in the future. It clearly impacts on birth rates, household structure, occupation profile, earnings potential and urbanization. It also affects consumption habits. Note: A detailed Table giving the education profile of the labour force for each year to 2021 is given in Table 3.1 in the accompanying Excel file.

54. Asian Demographics LtdChina Contents page 54 The Education Profile of Persons 15 yrs + The overall education standard of the adult population is expected to improve more rapidly in future as a result of there being fewer school age children (see later). By 2013 a projected 77% will have secondary or better education, up from 58% in 2003. This, as shown later, will have positive implications for the productivity of the labour force and hence growth of both real GDP per capita as well as total real GDP which in turn will attract investment.

55. Asian Demographics LtdChina Contents page 55 China’s Education Profile Relative to Asia: 2002 While there has been a significant improvement in China’s education standard, it is still behind the region in terms of overall education standard. This is both good and bad news. Assuming that the government sustains its effort to improve the education standard of its adult population then the upside potential of the economy (as a result of improved skill levels of the labor force) is considerable. But, until that improvement is achieved the overall affluence of people in China will be lower than most other countries.

56. Asian Demographics LtdChina Contents page 56 Persons 15 yrs + with Secondary or Tertiary Qualifications For the last decade (1993 to 2003) China added an average of 21.15 million persons with secondary qualifications and 3.68 million with tertiary qualifications each year. This is an average annual rate of 5.4% and 11.2% respectively. It is projected that the number of secondary level graduates will grow at around 20 million each year through to 2023. In the case of tertiary level graduates the increase is projected to be just under 5 million per annum through to 2023, making them 14% of the labour force, up from 6% in 2003.

57. Asian Demographics LtdChina Contents page 57 The Projected Demand for School Age Education Facilities: In this respect China has a strategic advantage. The changing age profile of the population means that the number of persons seeking school level education is also in decline. Therefore the government can improve the quality of education without any need to increase the budget (although one hopes it does increase the budget as well). This is an advantage to China. With the exception of Thailand all other countries of similar affluence are facing an increasing number of school age children and their ability to improve education standards is constrained.

58. Asian Demographics LtdChina Contents page 58 The Labour Force The Labour Force is important for a number of reasons. –First, obviously, it is a market in its own right and the size and composition of it creates demand for particular products and services. –Second, understanding the trends in factors affecting the size and productivity of the labour force provides a basis for understanding the future size and growth of the economy and affluence of the individuals within it. Note: A detailed Table giving the size, gender composition, occupational profile and industry sector employment for each year to 2021 is given in Tables 7.1 to 7.4 in the accompanying Excel file.

59. Asian Demographics LtdChina Contents page 59 The Size and Growth of the Employed Labour Force For the next 5 years the increase in size will be smaller than that of the previous five years. Furthermore, after 2009 the absolute size of the labour force is projected to decline. For the decade 2013 to 2023 the labour force is projected to decline at 0.9% per annum, a drop of 67.3 million persons. Note: The projection assumes that the average unemployment rate for the pervious decade continues into the forecast period – it is actually higher than average in 2002

60. Asian Demographics LtdChina Contents page 60 Growth Rate Relative to Asia Relative to Asia, China is one of five countries where labour force growth is under 1% per annum for the next decade, and then goes negative for the subsequent decade (2012 to 2022).

61. Asian Demographics LtdChina Contents page 61 Trend in Propensity to Work The historic downward trend in this is a reflection of increased education opportunities delaying entry into the labour force. For the next decade, with the projected high growth of the economy and declining number of new entrants to the labour force the propensity to work is expected to stabilize at around 82% which is quite high relative to the region.

62. Asian Demographics LtdChina Contents page 62 The Changing Occupation Profile of the Labour Force: Historically the agriculture labour force has consistently been 41% of the non urban population and that is the basis used for forecasts. The overall trend is that the agricultural component of the labour force is projected to continue a steady decline both in absolute numbers and as a proportion of the labour force. Conversely, with the rapid increase in post secondary education, so the skilled white collar component is projected to increase, through to 2023 even though the total labour force is projected to decline after 2009. Note: Skilled white collar is Professionals, Associate Professionals, Managers and Administrators.

63. Asian Demographics LtdChina Contents page 63 The Changing Size of the key Occupation Groups in the Labour Force: This table shows the effect of the proportion changes in the occupation profile of the labour force profile (previous page) on the absolute number of persons in each occupation group. The ‘skilled white collar’ and ‘clerical and service’ segments are projected to grow at 2.0% and 1.9% per annum respectively over the next decade. This is against total labour force growth of 0.3% pa. In contrast manufacturing will decline at around 0.6% per annum for the decade and as for most other countries in Asia, the agricultural sector is also projected to decline in absolute size.

64. Asian Demographics LtdChina Contents page 64 The Labour Force and the Economy It is possible to use the size and productivity of the labour force to estimate the likely capacity of the economy, and hence the average Gross Domestic Product over a period of time. However, it should be appreciated that the growth rate of a particular year will vary from the average trend.

65. Asian Demographics LtdChina Contents page 65 Trend in the Gross Productivity and Size of the Labour Force: A strong historical relationship exists between the GDP per labour unit employed and the overall education standard of the labour force. Based on that relationship and projected trends in education, it is expected that real GDP per labour Unit will grow by Rmb 930 per annum in real terms for the period 2003 to 2013. This compares with Rmb 785 per annum for 1993 to 2003. However, in growth rate terms it is 4.9% per annum compared to 7.6% for the previous decade. The Figure also shows the trend in the size of the employed labour force. In absolute terms the number of workers is projected to grow by 20.7 million in the next decade, compared with 83.6 million the previous decade.

66. Asian Demographics LtdChina Contents page 66 Implications of Size and Productivity of Labour Force for Real GDP Growth The future trend in GDP year on year growth rate is really an inevitable consequence of the slower growth rate of the labour force. The trend in total real GDP growth rate over the last 10 years has been moving to this level as indicated by the ‘projection line’ in the chart opposite. It might be noted that for the decade to 2003 total real GDP grew in absolute terms by Rmb 651 Billion per annum. For the next decade it is projected to grow at around Rmb 750 Bn per annum.

67. Asian Demographics LtdChina Contents page 67 Implications for Real GDP per capita Growth A strong GDP growth does not translate into growth of individual affluence unless the population is growing at a slower pace than the economy. Therefore the true measure of improved affluence of a country is GDP per capita. Using the projected figures for total population and total GDP, indications are that the economy will achieve an average of 5.9% per annum growth in per capita GDP to 2008, dropping to 4.1% for 2008 to 2013.

68. Asian Demographics LtdChina Contents page 68 US$ GDP per Capita Relative to the Region While the growth statistics might be positive, in absolute US$ terms China is currently (2003) one of the less affluent countries in the region at a GDP per capita of US$993 in 2002. Furthermore, the projected growth of the economy is not sufficient to significantly change the position by 2012 although the gap between China and Thailand does reduce. Also note that if the Rmb was revalued – which is unlikely but has been promoted as a concept – then the position would change significantly and almost surely result in China matching if not exceeding Thailand.

69. Asian Demographics LtdChina Contents page 69 Dependents per Employed Persons One demographic variable that significantly influences the ability of a country to lift its GDP per capita is the ratio of dependents per employed person. If this can be lowered (i.e. a higher proportion of the population is working) then GDP per capita also tends to lift at a faster pace. In the case of China this ratio has been declining quite steadily and this clearly helps the overall trend in individual affluence. However, with the ageing of the population the rate of decline slows after 2008.

70. Asian Demographics LtdChina Contents page 70 Household Income The evolving nature of the distribution of households by income has considerable implications for the marketing of a wide range of products and services. Yet household income is not generally reported by any country in a manner which allows a proper understanding of the changes that are taking place. For example, it is rarely adjusted for the effects of inflation. Asian Demographics have developed a proprietary statistical model which removes the effects of inflation and shows the real historical changes in the distribution of households by income and the projected changes for the next decade. It also provides the inflation adjusted mean, median and variance which can then be used for forecasting relative to GDP forecasts. Note: A detailed Table giving the distribution of allhouseholds by annual income and their expenditure pattern for each year is given in Tables 5.2, 5.3 and 6.1

71. Asian Demographics LtdChina Contents page 71 Trend in Average Urban and Rural Household Incomes: 1993 to 2023 Average Household Incomes have grown steadily since consistent data series have been available. However, do note the difference in growth rates between urban and rural. [Note: the fluctuation in rural incomes is a function of fluctuations in reported household size. This impacts household income as that is reported on a per capita basis in raw format.]

72. Asian Demographics LtdChina Contents page 72 Growth Rates in Average Urban and Rural Household Incomes: 1998 to 2023 These are the growth statistics associated with the chart on the previous page. The differential between the urban and rural households is considerable. Do note that growth statistics can be misleading, the rate declines as the base on which they are calculated increases. As such while the analysis shows much slower growth rates for the next 5 years (5.7% compared with 7.3%), in absolute real terms average household incomes are increasing by a greater amount than in the previous 5 years (Rmb 1,150 pa compared with Rmb 1,069 pa).

73. Asian Demographics LtdChina Contents page 73 Comparative Distributions of Urban and Rural Households by Income: 2003 This chart serves to show the dichotomy of income distribution between urban and rural households. In 2003, urban households which are 44% of all households, account for 79% of all households earning over Rmb 40,000 (US$4,800).

74. Asian Demographics LtdChina Contents page 74 Is the Data Reliable? Many claims are made about incomes being understated in China. A simple ‘sanity check’ on these claims is to determine what percentage of total GDP in 2002 does total (urban and rural) household expenditure (which is a function of income) represent. While China is, perhaps, on the low side, it is not significantly so for a socialist society. There is no real case to argue that incomes are significantly (>10%) higher than that reported by official sources.

75. Asian Demographics LtdChina Contents page 75 Urban Household Income and Expenditure The Following two sections focuses on the distribution of urban households by Income and their expenditure. The subsequent two sections looks at the same for Rural Households. Note: A detailed Table giving the distribution of all urban households by annual income and their expenditure pattern for each year is given in Tables 8.1 to 8.3.

76. Asian Demographics LtdChina Contents page 76 Changing Shape of the Income Distribution: 1995 to 2013 Urban Households The overall trend is one of steady improvement in the distribution of households by income. As is apparent from this chart, by 2003 a solid ‘middle class’ (earning between Rmb 16,000 and Rmb 40,000 was in place and these are households that can afford to spend beyond the essentials of living. This middle class is now projected to expand upwards and will grow rapidly in size and affluence as detailed on the subsequent pages.

77. Asian Demographics LtdChina Contents page 77 Projected Distribution of Urban Households by Income – by Quintile size (Rmb breaks) This table shows how dramatically the distribution of income is changing in urban China. For the next 5 years even the middle quintile starts to decline in absolute size as the ‘weight’ of households moves into the income range of what is currently the top two quintiles. By 2013 it is projected that 49.2% of urban households will have an income above that used to define the top 20% in 2003. To make the point further, there are currently 34.1 million households earning over Rmb 34,488 pa. By 2013 there will be 115.0 million.

78. Asian Demographics LtdChina Contents page 78 Projected Distribution of Urban Households by Income – by Quintile size. US$ Breaks This is the same information as on the previous page except that the break points are now expressed in US$s.

79. Asian Demographics LtdChina Contents page 79 Sensitivity of Market Size to 1% Point change in Average GDP Growth rate 2003 to 2013. The base case assumes the total GDP grows at an average of 5.2% per annum for the period 2003 to 2013. This table shows the impact on the distribution of households if the GDP grows at an average of 4.2% (pessimistic) and 6.2% (optimistic). Compared with the expected average urban household income of Rmb 41,803 in 2013, under the pessimistic scenario the average would be Rmb 39,716 and under the optimistic scenario it would be Rmb 46,676.

80. Asian Demographics LtdChina Contents page 80 Sensitivity of Top Quintile to 1% Point change in Average GDP Growth rate 2003 to 2013. This is a subset of the previous page and shows the trend in projected size of the top quintile (households earning over Rmb 35,000 (US$4,200 approx) to the different GDP growth scenarios. Potentially the size of this ‘consumption’ segment could vary by 14% around the most likely outcome by 2013. However the difference in outcomes is quite small (less than 10% variance) until 2008, suggesting that projects with a payback within that time period are less at risk in terms of GDP outcomes.

81. Asian Demographics LtdChina Contents page 81 Urban Household Expenditure Patterns The manner in which households spend their money evolves with affluence. The proportion spent on essentials declines as affluence increases and as a result the more discretionary product and service categories experience growth rates much faster than would be expected on the basis of the growth of the overall economy. Using the Asian Demographics Household Income and Expenditure Model (which models the historic trends after removing effects of inflation and then provides forecasts of these trends) this section discusses the possible trends in Household Expenditure through to 2013.

82. Asian Demographics LtdChina Contents page 82 Average Propensity to Spend As a general rule, over time households spend a smaller proportion of their total income as their income increases. However, the reduction is less than the increase in income so total expenditure per household still increases. There has been some variability in the relationship between income and expenditure in the past, but the projected pattern of income and expenditure indicates that the proportion spent will increase from 24% in 2003 to reach 27% in 2013.

83. Asian Demographics LtdChina Contents page 83 Implications for Average Absolute Amount Spent and Saved per Urban Household - Rmb The net effect of –Increasing average urban household income at 4.7% per annum for 2003 to 2013 and –Consequent increased propensity to save means that for 2003 to 2013 –Average total expenditure per household is projected to grow at 4.3% per annum. –Average amount saved per household is projected to grow at 5.9% pa –And in absolute terms the average amount saved per household increases by 77%.

84. Asian Demographics LtdChina Contents page 84 Implications for Average Absolute Amount Spent and Saved per Urban Household – US$s This table replicates that of the previous page except that all values are now US$s using the exchange rate for each year applied to the local currency expressed in constant 2002 values. This gives an order of magnitude to the average household's income, expenditure and savings in US$s

85. Asian Demographics LtdChina Contents page 85 Implications for Total Expenditure and Savings of all Urban Households The projected increase in average urban household expenditure and savings combined with the projected increase in the absolute number of urban households mean that for 2003 to 2013: –Total urban household expenditure is projected to grow at 7.6% per annum and –Total urban households savings are projected to grow at 9.3% per annum. Both are good ‘drivers’ for the domestic economy.

86. Asian Demographics LtdChina Contents page 86 Average Pattern of Expenditure per Household Urban Households Being a developing country in terms of both age and affluence there is substantial change projected in the pattern of expenditure of the average household. For example food and clothing are projected to decline from 43.7% to 33.1% of expenditure between 2003 and 2013. Such a reduction in the proportion allocated to these basic aspects of living mean the other more discretionary categories grow as a proportion. The key growth area is transport and communications followed by recreation and education.

87. Asian Demographics LtdChina Contents page 87 Trend in the average absolute expenditure per household - Urban In the context of growing affluence and expenditure per household (4.0% per annum) even small changes in the proportion allocated to a category result in significant changes in the absolute amount spent. In absolute terms expenditure per urban household on transport, communications and health is projected to increase by 94% between 2003 and 2013. Recreation and education by 78%.

88. Asian Demographics LtdChina Contents page 88 Relative Importance of Income Quintiles The relative importance of the income quintiles in terms of share of urban household expenditure varies significantly – both now and over time. The top quintile (urban households earning in excess of Rmb 34,378 (approx US$3,800)) accounts for 34% of all urban household expenditure in 2003. As a result of projected increases in overall affluence of the economy, 49% of all households will meet this income hurdle by 2013 and they will account for 69% of all urban household expenditure. Finally, note that the highest income quintile accounts for 48% of all savings in 2003, increasing to 83% by 2013.

89. Asian Demographics LtdChina Contents page 89 Urban Household Expenditure Pattern by Quintile: 2003 The combined effects of significant differences in average income and propensity to spend (the lowest quintile spend 90% of their income where as the highest spend only 66%) mean expanding differences in expenditure patterns. While the highest quintile spends 2 times as much as the lowest on food, it spend in excess of 4 times as much on most of the other categories of expenditure.

90. Asian Demographics LtdChina Contents page 90 Rural Household Incomes and Expenditure The Following two section focuses on the distribution of rural households by Income and their expenditure patterns. Note: A detailed Table giving the distribution of all urban households by annual income and their expenditure pattern for each year is given in Tables 8.4 to 8.6.

91. Asian Demographics LtdChina Contents page 91 Changing Shape of the Distribution: 1998 to 2013 Rural Households As shown at the start of this section, rural households income has and is projected to continue grow at a much slower rate than that of urban households. Consequently the change in the distribution of households by income over time is less dramatic.

92. Asian Demographics LtdChina Contents page 92 Projected Distribution of Rural Households by Income – by Quintile size (Rmb breaks) While the average rural income is increasing, the number of rural households is not. Therefore the growth of the top two quintiles is much more moderate than that of urban households, but it nonetheless positive. The highest quintile is projected to increase from 42 million households in 2003 to 71 million in 2013. The next highest quintile is relatively stable in size, and the three lower quintiles are all projected to decline in size.

93. Asian Demographics LtdChina Contents page 93 Projected Distribution of Rural Households by Income – by Quintile size. US$ Breaks This is the same information as on the previous page except that the break points are now expressed in US$s.

94. Asian Demographics LtdChina Contents page 94 Sensitivity of Market Size to 1% Point change in Average GDP Growth rate 2003 to 2013. The base case assumes the total GDP grows at an average of 5.2% per annum for the period 2003 to 2013. This table shows the impact on the distribution of households if the GDP grows at an average of 4.2% (pessimistic) and 6.2% (optimistic). Compared with the expected average household income of Rmb 14,556 in 2013, under the pessimistic scenario the average would be Rmb 14,226 and under the optimistic scenario it would be Rmb 16,142.

95. Asian Demographics LtdChina Contents page 95 Rural Household Expenditure Patterns The manner in which households spend their money evolves with affluence. The proportion spent on essentials declines as affluence increases and as a result more discretionary product and service categories experience growth rates much faster than would be expected on the basis of the growth of the overall economy. Using the Asian Demographics Household Income and Expenditure Model (which models the historic trends after removing effects of inflation and then provides forecasts of these trends) this section discusses the possible trends in Household Expenditure through to 2013. Note: A detailed Table giving the distribution of household expenditure by expense category for each year is given in the Appendix. Table 6.1

96. Asian Demographics LtdChina Contents page 96 Average Propensity to Spend While Rural households on average earn 57% less than urban households, they nonetheless have a greater propensity to save. In 2003 only 65% was spent, compared with 76% for urban households. This means that the rural market is substantially smaller than the urban market even in spite of having more households. For 2003 to 2013 it is expected that the proportion not spent (i.e. saved) will increase from 35% to 42% given projected trends in average total income and expenditure patterns.

97. Asian Demographics LtdChina Contents page 97 Implications for Average Absolute Amount Spent and Saved per Household - Rmb The net effect of –Increasing average household income at 2.7% per annum for 2003 to 2013 and –Consequent increased propensity to save means that for 2003 to 2013 –Average total expenditure per rural household is projected to grow at 1.5% pa. –Average total savings per household is projected to grow at 4.5% pa. –And in Absolute terms the average amount saved per household increases by 56%.

98. Asian Demographics LtdChina Contents page 98 Implications for Average Absolute Amount Spent and Saved per Household – US$s This table replicates that of the previous page except that all values are now US$s using the exchange rate for each year applied to the local currency expressed in constant 2002 values. This gives an order of magnitude to the average household's income, expenditure and savings.

99. Asian Demographics LtdChina Contents page 99 Implications for Total Expenditure and Savings of all Rural Households The projected increase in average rural household’s expenditure and savings combined with the projected decrease in the absolute number of rural households mean that for 2003 to 2013: –Total rural household expenditure is projected to grow at 1.2% per annum and –Total urban households savings are projected to grow at 4.2% per annum. This indicates a slower rural economy relative to the urban economy.

100. Asian Demographics LtdChina Contents page 100 Average Pattern of Expenditure per Household Rural Households Being both less affluent and also having slower average income and expenditure growth, the relative proportion allocated to the main categories does not change dramatically over time. However, gradually the proportion devoted to food and clothing has and will be reducing (from 54.8% in 2003 to 49.8% in 2013) and this does mean a greater proportion can be given to other areas of expenditure.

101. Asian Demographics LtdChina Contents page 101 Trend in the average absolute expenditure per household - Rural In absolute terms, expenditure per household on food and clothing is expected to be almost unchanged for the next decade – in spite of a smaller household size. Additional funds appear to now be allocated to transport and communications, recreation and education and health. These are projected to increase by over 33% per household over the decade.

102. Asian Demographics LtdChina Contents page 102 Relative Importance of Income Quintile With the lower average incomes of rural households the distribution is less extreme and the top quintile accounts for 36% of all rural household expenditure in 2003. As a result of projected increases in overall affluence of the economy, 35% of all rural households will meet this income hurdle (Rmb 14,803) by 2013 and they will account for 54% of all rural household expenditure. Finally, note that the highest income quintile accounts for 55% of all savings in 2003, increasing to 71% by 2013.

103. Asian Demographics LtdChina Contents page 103 Rural Household Expenditure Pattern by Quintile: 2003 There is a considerable dichotomy between the lowest and highest quintiles in terms of absolute spending levels. Even for the basic category of food, the differences are great. Also note that in the lower quintiles the amount of expenditure on the more discretionary categories (e.g. transport and communications) is minimal.