Domestic consumption is an investment theme long shared by many international fund managers looking to invest in Asia, but China is one market where spending power is far from being an old story.

ôThings would have to go desperately wrong globally for [consumption growth] in China to be derailed,ö Paul McKenzie, head of consumer research at CLSA, said in the sidelines of the recently held CLSA Investors forum.

Higher wages and rapid urbanization are among the main drivers of consumption in China. McKenzie notes that wage increases have ranged between 12%-20% for white collar jobs over the past 12 months and 8%-12% for blue collar jobs. And in urban areas, the wage increases have been higher than the national average.

Another driver that McKenzie is excited about is the rise in consumer credit. ôThere is a huge scope for the growth to get bigger,ö he says.

McKenzie cites several data to justify his optimism. Consumer loans have jumped to around $365 billion in June from $2.1 billion in 1997. Despite that surge, consumer loans make up only around 11% of total outstanding loans compared with a higher percentage of 40%-50% in other markets.

Around six years ago, there were virtually no credit cards in China and now there are around 82 million credit cards. That penetration rate of 0.1% of the banking population is still very low compared with 3% in South Korea and Taiwan, 2.5% in Hong Kong, and 0.5% in Thailand and Indonesia.

ôThe availability of credit led to the consumption boom in the US. We think thatÆs where we are in China,ö McKenzie says.

High-end retailers are likely the biggest beneficiaries of a consumption boom in China. McKenzie says. ôIncome growth in China is strongest among the highest income earners.ö

Others that stand to gain are companies that are in the health care, education, tourism and convenience store businesses.

Next to China, India also shows strong promise in terms of consumption growth and for the same reasons û albeit at slightly lesser extent û than McKenzie cited for the mainland.

ôCredit is a little bit more developed in India,ö leaving less room for growth compared with China, says McKenzie.

It is also more challenging to find companies that will stand out in any consumption boom in India because there are no clear market leaders. ôIn China, most of the consumer categories and retail segments are still fragmented and the market leaders tend to be the consolidators,ö he says.

Although Hong Kong is seen as a strong retail market that stands to gain from most things related to China, McKenzie is only marginally confident about the prospects of this market.

McKenzie says retail sales growth in Hong Kong are driven mostly by locals and not by tourists from the mainland, which was what many analysts expected when travel restrictions were eased.

ôI donÆt see any evidence of a big increase in the amount of money [mainland tourists] are spending in Hong Kong. It seems that the quality of the average mainland tourist has been going downö in terms of spending power, he says.

The strength of Hong KongÆs stock market is partly responsible for stronger retail sales, McKenzie says. ôStock market gains have had a strong impact on retail sales. Hong Kong investors are not necessarily cashing in on their gains, but if they feel they are wealthier, they spend more.ö

Meanwhile, McKenzie views nearby Macau as a competitor and not a complement to Hong Kong.

ôRetail sales in Hong Kong would be stronger if Macau were not around,ö he says. ôMacau is distracting mainland tourists from the spending that they would have done in Hong Kong.ö

The competition will just get stronger over time, especially since retail space in Hong Kong continues to become more pricey. ôHypothetically, a store like Prada or Louis Vuitton might have thought of opening five new stores in Hong Kong before, but now they could be considering opening just three stores in Hong Kong and two in Macau.ö