To understand the changing habits of the Chinese consumer, it is helpful to read a series of conversations about spending on Douban, a popular Chinese social media platform. Here, people wonder if it’s shameful to buy leftover cake or how to save money by switching from disposable tampons to reusable menstrual cups. As the pandemic ravaged the economy and disrupted lives, the group, titled “Did you turn down consumption today?” saw its number of users double to 300,000 in one year.
China has based its economic future on its spendthrift consumer class. Yet the conversations about Douban are further evidence of a disturbing trend for policymakers: consumers are increasingly frugal.
“I used to live paycheck to paycheck for the four years since graduating from college…but the pandemic has left me with a deep sense of crisis,” one user wrote. group. “So in 2020 I paid off all my credit card debt [and] deleted all the bags I wanted to buy from my shopping list.”
The number of posts in the group jumped from dozens to hundreds in the months following the start of the pandemic, according to Chinese outlet DT Data, which attributed the increased interest in the group to the fact that young people are more cautious about spending post-pandemic.
For years, China has attempted to shift from an economic model focused on exports and infrastructure to one that is more focused on domestic spending. Such a plan both aspires to the expenditure-driven models of Western economies and is consistent with a popular stream of economic wisdom, which sees all economic evolution directed towards a consumer-driven economy. The latest iteration is President Xi Jinping’s “dual circulation” strategy, which aims to boost domestic consumption and production to reduce China’s dependence on other countries.
But so far, China’s post-pandemic economic recovery still relies heavily on strong exports and growing industrial output. By contrast, its private consumption fell from 38.6 percent in 2016 to around 37.7 percent of the country’s GDP last year, the lowest level in the past five years. This segment represents about 61% of British GDP, while the figure is about 69% for the United States.
Although a recovery in retail sales helped China’s 7.9% GDP expansion in the second quarter, further outbreaks of Covid-19 in July weighed on retail sales that month. , which grew weaker than expected. As China prepares to release its third-quarter GDP figures next Monday (October 18), all eyes will be on September’s rebound in retail sales and the extent of the disruption the pandemic has caused.
China’s mixed history of consumer power
Overall, investment in infrastructure, manufacturing, real estate and exports have been the main drivers of China’s GDP growth in recent years. Although the focus on these sectors has helped provide jobs for many of the country’s migrant and blue-collar workers, they have become less sustainable in recent years. Growing local government debt and a shrinking workforce due to China’s aging population have prompted Beijing to find new engines of growth. He based his hope on consumer wallets.
Certainly, China has made substantial progress in growing its consumer power. In 2020, China’s total retail sales reached around 39 trillion yuan ($6.3 trillion), compared to around $4 trillion for the United States that year. The country remains a powerhouse for global luxury brands despite the pandemic, and is on track to become the world’s largest luxury market by 2025 according to Bain.
But despite this breathtaking growth, consumer spending is making a decreasing contribution to China’s GDP. According to the World Bank, Chinese household and government spending as a percentage of GDP fell from a peak of 85% in 1962 to 56% in 2019 and then to 54.3% in 2020. By comparison, the figure has remained much more stable in the country’s autonomous region of Hong Kong since the 1960s, reaching 79% last year, according to World Bank data.
At the same time, China’s national income is also increasingly being allocated to the government rather than households, according to Huang Dazhi, a researcher at China’s Suning Institute of Finance think tank. “Compared to before, for every 10,000 yuan of national income, citizens have less in the distribution of money, and therefore consumption is affected,” Huang wrote.
Chinese consumers face growing uncertainties
In recent months, coronavirus outbreaks, falling market returns, layoffs and power crises are among the factors forcing the Chinese to reassess their once optimistic outlook for their own future and cut spending. Most of these events are driven by unexpected policies issued by Beijing this year – its increased scrutiny of tech companies, for example, or its requirement that private tutoring companies suddenly become nonprofits.
Amidst the many worries and uncertainties, the Chinese middle class is abandoning its old habit of upgrading everything from cars to cosmetics. Instead, scrolling on social platforms like Douban suggests economic uncertainty and the pandemic have underscored the value of a thrifty lifestyle.
“This year, we only spent money on the education of our children. I feel that times will be tough for the next two years,” wrote a Chinese netizen recently. The comment was in response to an article asking readers about the impact of problems at Evergrande, the beleaguered property developer who missed interest payments on bonds owed to foreign institutions. Its inability to pay for purchases made by retail investors led to mass protests outside its Shenzhen headquarters last month.
“‘Black Swan’ events, like Evergrande, or such intermittent and sporadic threats…could add to the deterioration of [consumer] trust,” said Todd Lee, executive director of global economics at IHS Markit. China’s economy, which used to grow by double digits in the late 2000s, has seen its growth rate halve in the past 10 years. The combination of this macroeconomic backdrop of economic slowdown with these events, if they occur more frequently, could undermine consumer confidence, he said.
This can already be seen in the economic data. Online and physical retail sales rose 2.5% in August, well below the roughly 7% expected by economists, with the biggest declines in restaurants and foodservices, clothing, home appliances and more. communications and automobiles. A quick survey of the Douban Group’s messages promoting saving confirms that: milk tea, lipsticks, coffee and clothes are among the most important expenses that users say they would reduce by first.
Online spending was particularly weak in August, when China’s Covid-zero policy was last rolled out. While it jumped in previous coronavirus outbreaks as more people stayed home, that month the two-year compound growth rate of online retail sales fell 7.1 percentage points. compared to July.
This could indicate a long-term impact of the pandemic on consumption, according to analysts at investment bank China International Capital Corp.
Even young people, once among the biggest spenders, are thinking more carefully about their wallets, Cheng Shi, chief economist at Chinese brokerage ICBC International Securities, wrote in a note last month. “These new spending habits and trends will not stop with the end of the pandemic,” he added.
The Evergrande Effect
Beyond the pandemic, Beijing’s crackdown on housing is also weighing heavily on the minds of Chinese consumers, for whom real estate accounts for about 40% of household assets, according to HSBC. House prices are now starting to fall in some cities as authorities put increased pressure on developers to deleverage over fears of a housing bubble, forcing developers like Evergrande to give steep discounts in order to resolve their crisis of liquidity. This is good news for those trying to climb the housing ladder. But those whose savings are tied to real estate are likely to continue spending with less confidence in their own economic well-being.
The only people who seem to remain confident enough to spend are the wealthy. Duty-free shops on the southern island of Hainan saw sales surge on a seven-day public holiday earlier this month, as customers who couldn’t easily travel overseas shopped for luxury goods at the square.
Surveys also show that Chinese luxury shoppers plan to continue buying these items. This attitude highlights the growing wealth gap between the haves and have-nots in China, whose post-pandemic recovery has been uneven.
China faces a difficult road
Chinese authorities now face the challenge of finding ways to boost consumption amid low confidence. One potential avenue for the government is to strengthen its social security, pension and health insurance systems, said Lee, the economist.
Many citizens, including hundreds of millions of migrant workers, are excluded or not comprehensively covered by China’s social security system. This may be one of the main reasons why a survey conducted by China’s central bank in the second quarter found that nearly half of urban household respondents said they intended to save more. Young people born under China’s one-child policy, which was lifted in 2015, also feel the need to save to care for their aging parents and prepare for their own age, Cheng wrote, economist at ICBC.
For now, expanding the social safety net is not explicitly part of the government’s broader solution to achieving “common prosperity,” Xi’s ideal of redistributing wealth and making the masses prosperous. But Xi acknowledged the importance of social security as a “basic system safeguard” to improve the wellbeing of the general population.
Instead, Beijing should focus on value-added taxes on basic necessities and increasing the sales tax on luxury goods to boost consumption, analysts at the brokerage firm say. Chinese Guosheng Securities. “To fundamentally increase consumer spending, [the government] must reform policies in the medium to long term to increase household incomes,” the analysts wrote. “In a certain sense, the objective of encouraging consumption is in line with the desire for ‘common prosperity’.”