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Demand for Food Quantity and Quality in China
Fred Gale and Kuo Huang
Economic Research Report No. (ERR-32), January 2007
Rapid income growth is changing the structure of Chinese food
expenditures, a development that has important implications
for China's agricultural and food sector and for international
trade in agricultural products. As household incomes rise, consumers
demand not only a greater quantity of food, but also higher
quality. The demand for quantity diminishes as income rises,
and the top tier of Chinese households appear to have reached
a saturation point in quantity consumed of most food items.
Most additional food spending by this emerging middle class
of consumers is spent on higher quality or processed foods and
meals in restaurants.
What Is the Issue?
Past studies have indicated that demand for many foods—especially,
meat, poultry, fish, and dairy products—responds to income
growth. However, there have been many changes in China's food
landscape in recent years, including the emergence of a new
middle class of consumers, the rise of supermarkets, restaurants,
and other modern retailers, and expanded availability of food
products. Most food demand studies were based on data from time
periods before these structural changes had taken hold.
Given the responsiveness of food demand to income growth, China's
rapid growth of 9-10 percent per year suggests that its demand
for food is growing faster than its production capacity. While
China has become a major importer of soybeans and vegetable
oils, it has remained surprisingly self-sufficient in most food
products. Do conventional studies of food demand overstate the
potential for demand growth in China? The rapid change in food
markets and surprisingly slow growth of food imports warrants
a new assessment of food demand in China.
What Did the Study Find?
A disproportionate share of China’s income growth accrues
to high income households who are purchasing mainly greater
value added in food consumption rather than increased quantity.
High-income consumers devote expenditures to higher quality
food: better cuts of meat, processed and packaged food, meals
away from home, and food that is safer, more convenient, or
healthier. The demand for quality has been a factor driving
the rapid growth in supermarkets, convenience stores, and restaurants—outlets
that offer greater convenience and quality in food purchases.
The top tier of urban households in China appear to have reached
a saturation point in quantity of food consumed at income levels
that would be well below the poverty line in the United States.
The top 10 percent of Chinese urban households had average household
incomes of just $7,000 in 2003, still poor by developed country
standards.
For most food items, the quantity consumed by Chinese households
is highly responsive to income growth at low income levels.
Rural households (about 60 percent of the population) and low-income
urban households (20 percent) are at income levels where they
demand increased quantities of many foods as their income rises.
Low-income consumers’ demand for items like meat, dairy
products, and beer is much more responsive to income increases
than is demand by consumers with higher income. However, low-income
households are experiencing less income growth and their food
spending has been sluggish as well. Income for rural and low-income
urban households has grown at less than half of China’s
10- percent GDP growth rate while income growth for the top
10 percent of urban households has exceeded 15 percent per year.
These food consumption and income growth patterns may explain
how China has been able to remain self-sufficient in most food
items. A large proportion of China’s income growth has
been devoted to greater value added in food processing and marketing
rather than increased quantity.
There is a growing segmentation of the China market linked
to the emerging demand for food quality. Chinese food retailers
offer a wide range of food products appealing to demands for
safety, quality, and health attributes demanded by high-income
urban consumers. However, the majority of Chinese consumers—those
with less discretionary income—consume less expensive
generic food items.
How Was the Study Conducted?
The study analyzed tabulations of income, food expenditure,
and food consumption data from China's national household income
and expenditure surveys for 2002 and 2003. National averages
by income class were analyzed for both urban and rural households.
The analysis included estimation of regression models explaining
per capita quantity consumed and expenditures for detailed food
categories. The study estimated elasticities of food quantity
and quality with respect to household income. The study used
a model that allows elasticities to vary over different income
levels. Quantity data included only food consumed at home. An
analysis of expenditures on food away from home indicated that
most food is still consumed at home.
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