Wang Zhiwei, who owns a sportswear and equipment shop in the western Chinese city of Chengdu, said he ran out of money after a lengthy closure during the Covid pandemic, but a bank loan got him back up and operating.
“We got rent money, inventory, funds to pay employees for the rest of the year,” he said. “We’re just missing customers.”
Chinese consumers are entering a “new normal” of lower spending, beset by a lack of confidence—in job stability, wage growth, property values, and policy support, according to official data and conversations with businesses and would-be buyers.
The most recent metrics by the statistics bureau support these concerns, with slowdowns in manufacturing, construction, and the services sector.
The subdued atmosphere is reflected in this year’s Singles Day shopping festival, now under way. The three-week consumer bonanza produces huge sales numbers for e-commerce leaders such as
Alibaba Group Holding
(ticker: BABA), and
JD.com
(JD). But this year, merchants on the platforms slashed prices more than usual to hit transaction volumes in the range of prepandemic levels, sellers told Barron’s.
“We’re basically offering loss-making discounts,” said Li Yuhua, who sells phone accessories such as screen protectors across most of China’s myriad online platforms.
When asked if the festival’s deep price cuts might offer a stronger appeal during tough economic times, with many consumers requiring—not simply enjoying—lower prices, Li said: “Maybe. Or maybe they don’t buy during the sales period and they don’t buy at other times as well.”
Discounts or not, evidence points to an emphasis on essentials, such as food and healthcare, validating Li’s low expectations for her nonessential goods.
PDD Holdings
(PDD), parent of e-commerce app Pinduoduo, said last week it is seeing a trend of more “rational” shoppers—meaning people are buying staples over discretionary goods more so than in previous years.
In a report on its early Singles Day results, Pinduoduo cited strong sales in categories like home textiles such as bedding, and in produce, particularly fruit. It also noted relative outperformance in lower-tier cities, where residents generally spend a larger share of their income on essential goods compared with their wealthier big-city peers.
Pinduoduo isn’t the only company noticing this so-called “rational” consumer trend. The term is popping up in business circles and financial media, mainly as a euphemism for the increasingly reluctant shopper. It isn’t reluctance, the term implies, so much as selectivity, a growing sophistication in taste. It doesn’t sound like a term that would capture, say, a worried homeowner watching his core investment dwindle as property prices plummet.
State-run outlet China Consumer News said on Friday that “rational consumption has gradually become mainstream in China.”
“Consumers are now very cautious when shopping, have a richer understanding of products, and only buy the most worthwhile products,” it explained.
While it’s logical that as China’s middle class swelled over the last two decades, consumers demanded higher quality goods. But it doesn’t fully explain the sudden emergence of the “rational” consumer.
Last month’s official growth rate for retail sales—a loose gauge of consumption—was 5.5%. Many countries would be happy with that kind of consumption, but China’s retail sales have grown at an average rate of 12.5% over the last 30 years. Moreover, the country was supposed to see a year of particularly high consumption rates following the end of the pandemic and the resumption of economic activity.
On top of that, the property sector—the place where most Chinese put their savings and investments—remains in crisis, with home values tumbling.
“House prices are now falling versus rising at a double-digit rate before 2021. The negative wealth effect from deflating house prices and slower income/wage growth are dampening consumer spending,” Arthur Budaghyan, chief China and emerging markets strategist for BCA Research, told Barron’s.
Businesses are in turn feeling the pinch. Quarterly results from global consumer giants showed weak demand across a range of sectors, from
Estée Lauder
to
Yum China.
Research firm Canalys estimates that smartphone sales fell 3% in July to September from a year earlier.
After nearly a year of analysts predicting that Beijing will step in with some form of direct demand-side stimulus, the government has plowed investment into infrastructure, creating what Beijing-based economist Michael Pettis calls “low quality” growth—which harms the economy in the long run.
Meanwhile, some policy prescriptions have been futile. Beijing ordered banks to cut loan requirements and turn on the money spigots for firms, but that does no good without buyers on the other end.
Pettis said that businesses tell him their biggest problem isn’t capital but weak demand. “This just reinforces the argument that the economy’s main problem is on the demand side,” he said.
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