Taylor Swift’s China Opportunity

Sketch of Taylor Swift, manga style (Chinese ink and watercolor)

Sketch of Taylor Swift, manga style (Chinese ink and watercolor)

Not long after Forbes reported Katy Perry outearned Taylor Swift by almost 70%, which we attributed to Perry’s embrace of the Internet age, it appears Swift is taking a page out of Perry’s (and other celebrities’) playbook.

Last week, Bloomberg reported that Swift has entered a venture with Chinese e-retailer JD.com to sell a new fashion line specifically to Chinese consumers (meaning the clothing is not available to anyone outside China), even as she prepares for her November performances in Shanghai. While the Wall Street Journal reports that this strategy is meant to cut off cheap knockoff apparel based on Swift, it also dovetails with the business model we have been advocating for musicians, wherein musicians use their music as a platform for other products.

Therefore, aside from the benefit of pushing out cheap knockoffs, this deal presents an opportunity for Swift to make some serious money.

How big of an opportunity? A $67 trillion opportunity, according to think tank The Demand Institute. Chinese consumers have the potential to spend this amount over the next ten years.

The road to profits of such magnitude, however, appears to be filled with obstacles.

Chinese consumption currently accounts for about 35% of GDP, relatively low, while household savings rest at 30% of disposable income, relatively high. This situation is at least partly attributable to China’s successful growth model, which relied on investment-led growth via a high household savings rate that financed industrialization, and hence, competitive exports.

Recall from our blog post on GDP that demand for GDP is:

Consumption + Investment + Government Expenditure + Exports – Imports.

So, in the past, China’s GDP has grown via: Investment > Consumption

Now, in the present, China wants GDP grow via: Consumption > Investment.

The current administration has vowed to increase consumer spending, but it may be easier said than done. Despite government spending on healthcare, pensions, and education, among other things, Chinese consumers continue to save. And although newly-affluent Chinese have been spending more as incomes have grown, saving has increased even more.

Some hold the opinion that the poorest Chinese believe that they cannot rely on rural pensions to support retirees, and, as a result, are saving more. Moreover, on the other end of the spectrum, the richest 5% of Chinese save about 70% of their income, accounting for half of household savings, according to some estimates. With China having a high Gini coefficient of 0.61, indicating a high level of inequality, some economists conclude that in order to get consumers to spend more, the Chinese government may have to combat economic inequality, something that probably will not be achieved overnight.

Will the Chinese government be able to spur higher consumption? There are many other factors influencing the Chinese economy, which we will tackle in a future blog post. In the meantime, we might speculate that Taylor Swift is taking the implicit view that the Chinese government will be successful in its transition from investment-led to consumption-led growth. But perhaps she should consider diversifying her revenue streams. After all, we imagine that her other fans around the world would want to buy into her fashion line!

Ramon Rodrigo Cuenca, CFA
Equities Analyst
Art and Finance

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s